How to report penalties on “busted” 72(t

L1: How to report penalties on “busted” 72(tThis is really a two-part question. We are dealing with a situation where the SEPP”s of two IRA”s may have been modified in 2004 through no fault of the taxpayer, who is now in the process of finalizing a request for a Private Letter Ruling. If the 10% additional tax applies, it will amount to about $40,000 through 12/31/2004, including all prior years. Question 1:In the event of an unfavorable ruling, how is the 10% additional tax reported? The Form 5329 instructions state that if the tax applies to prior years, a separateForm 5329 should be separately filed for each prior year. However, Code Section 72(t)(4)(A) states that if a modification to the series of payments occurs “the taxpayer”s tax for the first taxable year in which such modification occurs shall be increased by an amount, determined under regulations, equal to the tax whichwould have been imposed, plus interest for the deferral period”.I conferred with a very knowledgeable IRA specialist at the IRS regarding this issue, and he discovered during our conversation that there was no clear guidance available.Question 2:The potentially offending event occurred in late 2004, and the tax return is now due by 10/15/2005. The taxpayer would rather not report the 10% additional tax until a ruling is issued. I am concerned about potential “accuracy-related” penalties if the additional tax is not reported. Will a full disclosure of why we are not reporting the additional tax protect the taxpayer from the accuracy-related penalties? Any thoughts or suggestions would be greatly appreciated.Thanks much.2005-09-24 17:17, By: Jim, IP: [66.56.182.21]
L2: How to report penalties on “busted” 72(tHello JIm:
Q1: You could certainly do a 5329 for each of the offending years; or, simply attach an ALERT to one 5329 giving the IRS all of particulars about distributions by year. You can leave the interst computations to the IRS or, most practicing CPAs have interest computation software that gets real close. Further, you should pay the penalties and estimated interest on filing.
Q2:DO NOT DO IT. Pay the penalties and interest otherwise your taxpayer will be assessed the accuracy penalties AND if there is a separate preparer involved they will be assessed a separate penalty (unrelated to the tax payer) for “knowingly preparing afalse or inaccurate return”; kinda like a preparer’s fraud penalty.
Jim. related to this whole situation, I too have prepared a PLR for a clientthat “caused a modification in 2003 through no fault of the taxpayer”; e.g. it is a clear an apparent trustee error. This PLR was filed about 2 months ago and I am not even anticipating a response from the IRS til next Spring. However, if you are comfortable, I would like to compare notes on facts & circumstances as well as ruling strategy with whomever is preparing your PLR.
TheBadger
wjstecker@wispertel.net
2005-09-24 18:14, By: TheBadger, IP: [66.250.23.21]