Calculation method

L1: Calculation methodHello,
I began a SEPP in January of 2003. My CPA tells meI did my calculation based off of the old regulations and that 2003 there were new requirements for the calculation. My custodian issued these distributions using reason code 1, and the IRS is questioning the validity of my SEPP.

– Is my calculation valid since I used the old regs?
– What can I do to prove to the IRS that this is valid?2006-08-02 13:11, By: Jmr, IP: [167.80.244.204]

L2: Calculation methodJmr… can”t really say without knowing the assumptions that you used. I believe tyhat Rev.Rul. 2002-62 applied to any plan adopted after 12/31/2002.
If you used the mortality table outlined in Rev.Rul. 2002-62 and an interest rate that would be equal to (or less) than the maximum rate outlined in 2002-62 you may be ok. If not, you may have problems.2006-08-02 17:11, By: Gfw, IP: [172.16.1.72]

L2: Calculation methodSure would have been nice between the CPA, the IRA custodian, and the IRS that at least one of them would have identified the problem inside of 3 years, allowing any retroactive penalties and interest to accumulate. 2002-62 should have been very high on the rader screen for any of those involved in assisting with the setup of the plan.
When did Code 1 first appear on the 1099R? (not that this would change the IRS opinion, but might well reflect on the IRA custodian).
2006-08-02 23:26, By: Alan S., IP: [24.116.165.157]

L2: Calculation methodThanks for the feedback. I am not sure what mortality table was used, but the calc was done in 12/02 using a 6% amortization rate. My understanding is that under the new regs, you had to use 3.98% if it started in January. I was wondering if the IRS would consider this beginning in 12/02 or 1/03, since the calc was done in 12/02.
Reason code 1 started in 2004. My custodian didn”t use code 2 in 2004 or 2005. The IRS is questioning my return for 2004. They”ve only stated there”s a penalty for my 2004 distributions. If this isn”t valid, wouldn”t the IRS ask for penalty in 2003 as well?2006-08-03 08:54, By: Jmr, IP: [167.80.244.204]

L2: Calculation methodThe plan starts with the date of the 1st distribution made to you – you probably have a problem.
Depending on how the 2004 problem is resolved, they will very likely open 2003 and 2005 as well.
Good luck.
2006-08-03 08:57, By: Gfw, IP: [172.16.1.70]

L2: Calculation methodThis really doesn”t seem like a good situation for you JMR.
I can maybe understand why your firm changed their code from a 2 to a 1….Didn”t the IRS change the instructions to the 2004 1099R and remove code 2 (SEPP)and 3 (Disability) and indicate that firms should code the distributions under code 1 which would require the account holder to file form 5329?
Then a few months later these codes were put back…..sometimes firms have to decode their systems and maybe at that time your firm decided put the burden on you to file form 5329
I”ve always had a problem with the way revenue ruling 2002-62 was handled by the IRS because normally more time is given before the regulations are effective. There was a 2.5 month turn around time to the rule change and I hope your auditor would take that in consideration since you had the best intentions….
Anyone else agree?2006-08-03 15:55, By: vince_n, IP: [167.80.244.204]

L2: Calculation methodAs painful as it seems to be, it looks like you simply had a “busted plan” when you took your first distribution in January, 2003. Like GFW said, a SEPP Plan starts with the date of the first distribution. So your first distribution is under Rev Ruling 2002-62 and not the old guidance. Even if you could be governed by the old guidance, I still think you have a “busted plan.” Reviewing your assumption input:
I am not sure what mortality table was used, but the calc was done in 12/02 using a 6% amortization rate. My understanding is that under the new regs, you had to use 3.98% if it started in January …
Using a 6% assumption is too great even under the old guidelines since they used120% of the previous month”s (December, 2002) AFR as the upper limit for January, 2003 start dates.
Suggest that you get a good CPA or tax attorney and get things settled with “The Service.”
Jim2006-08-04 09:48, By: Jim, IP: [70.184.1.35]

L2: Calculation methodYes, I do agree with Vince”s assessment of why the 1 code probably appeared in the first place. And the timing of the whole episode shows a considerable amount of bad luck. This also underscores going to the extra effort required to get the IRA custodian on board with the 1099R coding. It acts like an insurance policy against IRS scrutiny, and with some minority ofcustodians may contemplate a second check of your assumptions.2006-08-04 22:38, By: Alan S., IP: [24.116.165.157]