Breaking a SEPP… what interest rate do I use for the penalty?

L1: Breaking a SEPP… what interest rate do I use for the penalty?
Hello. I desire to break an existing SEPP (traditional IRA) which was started five years ago. I have taken distributions from this SEPP on an annual basis (once a year, each May). I intend to intentionally break the SEPP before the end of this tax year (2011).
I understand that I need to pay not only the 10% penalty on the extracted funds, but also that I must pay penalty interest on those distributions going back five years for the most recent distribution, four years for the next most recent distribution, etc.
My question is relatively simple. Do I use ONE interest rate to perform the calculations, or do I have to use many, going back five years (and which interest rate)? I will assume a mid-term rate(s) adjusted by 120%. I’m a finance guy, so MOST of this was
never a problem, but finding the right way to compute the penalty is my problem (I’ve never had to deal with late or lack of payment problems with the IRS, so the subject of tax penalties is foreign to me.).
If anyone has a simple example they’ve used in the past in order to calculate penalties in this situation, that would be appreciated… as time and inclination permit, of course.
Many thanks for your assistance in advance!
2011-12-07 18:06, By: aaxiom, IP: [151.205.247.42]

L2: Breaking a SEPP… what interest rate do I use for the penalty?
Usually, the taxpayer just pays the penalty when filing the 5329 and waits for the IRS to bill the interest. Maybea slight chance they will get lucky.
The penalty is probably calculated using the late payment interest rate, but that rate may have changed several times over the last 5 years. The IRS has not clarified exactly how they pro rate the time periods, etc. I would also
be surprised if all those who have been billed interest were able to figure out exactly how it was calculated, and even so there may not have been much consistency from one to another.
Perhaps others can be more specific.

2011-12-09 17:46, By: Alan S., IP: [24.116.66.40]

L3: Breaking a SEPP… what interest rate do I use for the penalty?
Alan is correct. Most practitioners rarely calculate the IRS interest, and those who do rarely get it correct. There are a couple of software programs that try to calculate interest the same as the IRS, but I do not recall their names.
One minor change to your scenario — I think the interest is calculated from the date of each distribution. to make it simple, the 2011 distributions would be 1 year of interest on the penalty, and similarly going back to the distributions in 2007 getting
5 years of interest on that penalty. Your wording seemed to indicate a calculation of 5 years of interest on the most recent distributions, and 1 year of interst on the distributions 5 years ago, and it seemed to indicate that the interest was on the distributions,
rather than on the 10% penalties.
2011-12-09 17:56, By: dlzallestaxes, IP: [96.227.217.194]

L4: Breaking a SEPP… what interest rate do I use for the penalty?
Greetings alan, dlzallestaxes…
Many thanks to you both for your kind and helpful replies.dlzallestaxes, I did indeed have the discounting periods backward — thank you for pointing out my error. This all makes sense
now. I will pay the 10% penalties for each payment, and expect to pay an interest penalty — calculated by the IRS — on top of that for each payment for the amount of time from the current tax year back to when the distribution was made (instead of the opposite,
as my misunderstanding indicated).
If anyone has further thoughts or information regarding my original question, please know that I would love to continue hearing from you. The more views the better, though I do believe
this issue has been adequately surrounded.
This site was instrumental in helping point the way to creating this plan five years ago. I yearn for a day when arcane rules, countless regulations, mazes of paperwork, and an army of
professionals aren’t required for such things.
Kind regards, to all of you!
2011-12-10 20:11, By: aaxiom, IP: [151.205.238.144]

L5: Breaking a SEPP… what interest rate do I use for the penalty?
You may not have to wait much longer.
The IRS Commissioner announced that they were workingon a new tax form, much simpler than even the 1040-EZ.
It has only 2 lines. The firstline asks ” How much did you earn ? ” The second line says ” SEND IT IN !!! ”
2011-12-11 04:56, By: dlzallestaxes, IP: [96.227.217.194]