72T Election

L1: 72T ElectionIf anyone could assist in the following issue, your comments are greatly appreciated.Individual made 72T election 9 years ago.In 2009 she did two things: 1. Made a trustee to trustee transfer of 50,000 to another IRA to purchase an annuity.2. In 2009 she took an additional 7500 ontop of her 25K required distribution.Prior to 2009 only the required 25K distribution was taken timely.Is the 50K transfer subject to penalty and is she subject to penalty on the 9 years of 25K distributions plus the 7500 additional distribution?Any thoughts on ways to get out of the penalty?Thanks so much for your thoughts.2010-06-02 22:13, By: pam, IP: [99.166.163.15]
L2: 72T ElectionWhat was her date of birth ? If shewas over59 1/2 when she took the extra $ 7,500, then no penalty. If she was not yet 59 1/2, then all of the $ 25,000 distributions ( $ 225,000) plus the $ 7,500 is subject to the 10% penalty, or a total penalty of $ 23,255 !!!! The$ 50,000 is not subject to the penalty because it was not a distribution out of SEPP72-T “universe”.2010-06-02 22:28, By: dlzallestaxes, IP: [72.78.110.86]

L2: 72T ElectionI have a similar situation but the distributions were almost $50,000 per year since 2003.The payments must continue until the LATER of (1) the date the individual turns 59 1/2 or (2) close of the five-year period beginning with the date the initial payment was received. My client was not 59 1/2 so we filed 1040Xs with 5329s attached for all years. Now the IRS has sent a letter back saying that the legal period has expired for the IRS to collect the tax for years 2003 through 2006 and to file a claim for refund within 2 years to get this money for these years refunded.How did you handle your filing to pay thetax and interest? And what would you do about the IRS letter?Molly2010-06-11 20:03, By: Molly, IP: [12.179.226.214]

L3: 72T ElectionMolly, problem here is that the reporting of a busted SEPP was not done correctly, and was followed by an IRS letter that was also incorrect. The IRS makes as many errors on SEPP plan administration as taxpayers do.Per Pub 590, p 52, “the recapture tax applies to the first year to which the change applies”. There is no need to amend any prior returns. There are different ways to report the busted SEPP on the current year return. For example:1) Taxpayer could complete a 5329 for each year and attach all of them to the current year 5329, pay the 10% penalty on the total and wait for the IRS to bill the calculated interest charge.2) Taxpayer could complete the current 5329 only and refer to an attachment itemizing the taxable distributions under the SEPP for each year and just compile the total amount subject to penalty.Obviously, the IRS is incorrect in stating that there is some statute of limitations for the penalty. The basic premise of a SEPP is that the penalty is owed for the entire term of the SEPP if the plan is busted. It is bizarre that the IRS would be offering a refund of the penalty. If the client pursues the incorrect refund, it will not necessarily end this matter with the IRS. A more senior staffer could easily intercept this now or later and come back with another billing plus more interest.For both posters,it may be worthwhile to look into the findings of theBenz decision, a recentPLR that you can pull up under “articles of interest” on this site.This case resulted in preservation of a SEPP when the extra amount taken out was covered by a separate penalty exception, higher education costs in the Benz case. If your clients had such extra penalty exception payments at least equal to the amount of the excess taken over the SEPP distribution, it may be worth pursuing the findings in theBenz case.It may also be worth checking to see if the effective date of the busted SEPP can be moved back based on the findings in PLR 1999 09059 for a voluntary busted plan. That might enable a new plan to be started earlier and eliminate some of the more recent current year payments for the penalty. It all depends on the amounts and timing of the distribution that busted the plan.2010-06-12 03:54, By: Alan S., IP: [24.116.165.60]

L4: 72T ElectionThank you so much for this information. You don’t know how I have researched this and agonized over the decisions I have made on how to handle this.Actually, my tax program, ProSeries gives these instructions. “If you do not have other changes and have not previously filed a federal income tax return for that year, file Form 5329 by itself.” If you have other changes, file Form 5329 for that year with Form 1040X, Amended U.S. Individual Income Tax Return.” Since a federal income tax returns had been filed in previous years, I did not follow the instruction in the first sentence. Even though we did not have other changes except for the Form 5329, I went with the second instruction because it appeared thatthere wereonly two options. Obviously, there is a third option of sending the 5329s with the current year. I wished I had found this site sooner.MollyThanks again.2010-06-12 20:12, By: Molly, IP: [12.179.226.214]