72T penalty help

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L1: 72T penalty help
I started monthly SEPPs in 8/2008 in 1/12th the annual amount for a total of five payments for that year. (DOB: 1954). In 2009 there were 12 monthly payments. Because the ANNUAL amounts did not match the IRS has determined I owe 10% plus penalties and interest
for 2008. Is there any chance I could prevail if I go to court based on error made in goog faith to take SEPP monthly payments for five years or until 59-1/2 starting as of 8/2008, not realizing that the ANNUAL amount had to be equal (no one told me this nor
was it covered by the Vanguard SEPP Booklet or in Pub 590)? And if I am liable, does it also mean that my SEPP was/is busted from the start, and that I will be subject to penalties for all subsequent years? HELP, please and thanks…
2011-07-26 20:35, By: JeffrreyJ, IP: []

L2: 72T penalty help
What type of audit letter did you receive?
What documentation do you have for you plan?
What are the assumptions that you used (Date of Birth, Date of 1st Distribution, interest rate, initial balance, etc.)?
2011-07-26 20:45, By: Gfw, IP: []

L3: 72T penalty help
I received repeated Examination letters, and now just received a Notice of Deficiency for tax year 2009. I began monthly distributions 8/2008. I used the annuitization method using 3.45% for an account balance of roughly $1.4 million, which computed to
$76,620 per year or $6385 per month.
These withdrawals continue monthly to this day. DOB 9/1954
The Notice of Deficiency gives me 90 days to file a Petition to the Tax Court.
2011-07-26 21:23, By: JeffreyJ, IP: []

L3: 72T penalty help
Documentation: The original Vanguard application, and printouts of withdrawals to date from my IRA in the amount noted. I did file Form 5329 for all tax years since 2008.
2011-07-26 21:27, By: JeffreyJ, IP: []

L3: 72T penalty help
While you might be misinterpreting the reason the IRS is billing you, if it is for the reason you stated, the IRS is incorrect. A pro rated monthly distribution for the first year (in your case 5/12 of the annual)is just as
valid as taking the full annual calculation.
But if you provide the info gfw requested, we can check to seeif there is anything else that could be causing the problem. Would also be interested to know if:
1) You took any distributions from the IRA prior to the August SEPP distribution
2) Your 1099R for the year totalled anything different than your 5 monthly distributions
3) If your 1099R was coded “1” in Box 7 and you failed to file a 5329 to show exception code “02”
2011-07-26 21:32, By: Alan S., IP: []

L4: 72T penalty help
One of the gurus here should be able to give you a reference to use to support taking a prorated amount in the 1st and last year of a SEPP 72-T plan, as an alternative to the full annual distribution in these partial years.
2011-07-27 04:21, By: dlzallestaxes, IP: []

L4: 72T penalty help
Alan, Thanks for your interest and help. However, you may be misunderstanding my predicament. My mistake was that the first year (2008) I took 5/12ths of the annual amount of $76,620, or $31, 925. In 2009 I took 12/12ths for a total of $76,620.
Thus the IRS is denying my exception of SEPPs because these amounts are different year-to-year. I did not realize that I was required to take $76,620 in both calendar years-Thus I guess I needed to take $15,324 each of the five months in 2008 so that the
total came out to $76,620 in 08 AND 09?
If you agree I scewed up, can you suggest what to do now? Much appreciated.
2011-07-27 05:36, By: JeffreyJ, IP: []

L5: 72T penalty help
We understand completely, and you did everything perfectly correctly. You did not screw up.
The IRS has almost no one competent enough to understand SEPP 72-T regulations. Unfortunately you got one of the vast majority of IRS incompetents who does not understand the regulations.
All that you need is a tax professional who understands SEPP 72-T plans to write to the IRS to explain the same thing that you just explained, and the IRS will tuck its head under its tail, and go away.
You could try to write to or reason with the IRS, but tax professionals can utilize the Practitioner Priority Services ( PPS) and the Taxpayer Advocacy Service ( TAS) to get issues resolved much faster and easier than taxpayers.
And it should not be any more than $ 500 for him to write the letter.
2011-07-27 05:50, By: dlzallestaxes, IP: []

L6: 72T penalty help
Dear Dizallestaxes, WOW, I hope you are right!
I talked to a local tax attorney today (one of only two) who is not an expert on 72T. He said he guessed he would need 6-10hrs @ $450/hr to research this. And you know it will be 10+! Then of course the billing continues for the letter, etc.
Can you suggest how I can find an expert on this subject who I can work with at a reasonable cost?
2011-07-27 06:20, By: JeffreyJ, IP: []

L7: 72T penalty help
Did the IRS specifically state that you could not pro rate the 2008 year or are they questioning your full annual calculation? We should verify your calculation, but would need the exact amount of the opening balance. It also
appears that you used less than the allowable max interest rate for an 8/08 starting month.
As for pro rating the first year’s payments, there are several IRS letter rulings approving this option and this option has been used by large numbers of plan participants over the last decade. Here is one of them:
I would not spend any money unless you convey this info to the IRS first and they still refuse to accept it. But let’s re check your annual calculation first…

2011-07-27 18:40, By: Alan S., IP: []

L8: 72T penalty help
They are not questioning either proration nor annual calculation-They simply state that the annual amount I took out in 08 ($31+K) does not match what I took out in 09 ($76+K). Thus they conclude that I do not qualify for exception under SEPP 72T.
As to the calculation, I used the NYLIM calculator for fixed annuitization method. The amount was $1,438,414 with 3.45% as the reasonable interest rate, age 54, 0 benefiiaries. Annuity factor was 30.5 using the Vanguard table. This all came out to $76,620
annually, for a monthly rate of $6385.42.

2011-07-27 21:54, By: JeffreyJ, IP: []

L9: 72T penalty help
OK – the calculator on this site generates 76,986 as the annual amount, and the difference is most likely due to the monthly payout reduction which some calculators apply, even though we do not believe the payout pattern should
reduce the calculation. The IRS appears to accept both outcomes presumably because your calculation could always have been less due to use of a lower rate, but it could not be more than the result from this site because this site using the max 120 mid term
rate. So I think your annual calculation should pass muster.
As such, the IRS problem IS the first year prorating since it is the sole reason why your first stub year payout is less than your first full year payout. Accordingly, I would recommend that you simply reply to the IRS that your
first payment wasdistributed in August, 08 as supported by a bankor IRA statement proving that. You can get the statement copy from either source. Then cite the PLR I posted above and tell the IRS that pro rating the first year payment has been approved
by the IRS for over a decade now according to the letter ruling and verified by IRS acceptance of a substantial number of 72t plans that have been prorating the first year annual calculation. Tell them that your monthly distributions have and will continue
to be identical under the modification date of your plan in accord with Notice 2002-62.
That should solve the problem, and by chance it does not, you can go to plan B which is probably to hire a CPA. The challenge there is to find one who understands the prior rulings and Notices, but most do not. Neither does most
of the IRS personnel as dlz has pointed out. In the end, the IRS will probably accept your payout history, but it may take some back and forth to get them to concur.

2011-07-27 23:04, By: Alan S., IP: []