Inadvertent Extra Payment
L1: Inadvertent Extra PaymentHave a client that started a SEPP plan in 2007. In 2008 we did a full transfer to a new custodian in May, or so we thought. We timed the transfer as close to the most recent monthly payment so that the transfer would be accomplished before the next payment was set to go out. The resigning custodian transfered all of the assets in a timely manner, except for the cash, which they sent two weeks later for no known reason. During the delay the resigning custodian processed an additional payment to the client… The client never informed me of the additional payment and on schedule a monthly payment was made from the new account. This was just uncovered recently after the client received a notice from the IRS for additional tax due. My suspicion is that the SEPP plan was busted when the resigning custodian sent the ‘additional’ payment, yes? Any thoughts or potential ways out of this? The client has continued to take what we thought were SEPPs ever since, so this could get ugly I imagine…2010-12-09 00:29, By: JasonS, IP: [220.127.116.11]
L2: Inadvertent Extra PaymentThe SEPP was busted when your client took out more than the scheduled annual paymentfor 2008 – doesn’t make any difference which custodian/trustee set the payment. It could easily have been corrected by taking less at one of the remaining payments in 2008/2010-12-09 00:43, By: Gfw, IP: [18.104.22.168]
L3: Inadvertent Extra PaymentOf course it could have been easily corrected that way.2010-12-09 00:46, By: JasonS, IP: [22.214.171.124]
L4: Inadvertent Extra Paymenti believe that the taxpayer is entitled to be compensated by the brokerage firm for the taxes on the inadvertent distribution, plus the 10% penalty on all of the cumulative distributions from inception. If this is deemed to be taxable compensation, rather than just a reimbursement, then it will ahve to be “grossed up” for the taxes on the taxes aspect as well.
If the brokerage firm wants to, they could pay for a “private ruling” to try to get an “equitable resolution” waiver from the IRS Commissioner or thru the taxpayer Advocacy Service.2010-12-09 02:19, By: dlzallestaxes, IP: [126.96.36.199]
L5: Inadvertent Extra PaymentDlz… Iquestion whether the brokerage firm is really liable, or whether the fault lies with the individual(s) requesting the transfer.
The plan wasn’t busted because of the additional payment, the plan was only busted laterwhen the total distributed was more than the calculated annual distribution.In this case I think the fault lies with either the owner, the person guiding/requesting the transfer or perhaps both.2010-12-09 10:39, By: Gfw, IP: [188.8.131.52]
L6: Inadvertent Extra PaymentDLZ, I have to agree with Gordon. I made the same kind of full transfer in 2008, and I knew enough to watch closely so I did not end up with 13 payments that year, as happened to him. The poster needed to notice that he had an extra payment deposited in his account from the old custodian, and then it could have been easily fixed, by requesting the new custodian just skip one payment before the end of that year.In addition, when his account came over to new custodian in two “pieces” that were weeks apart, that should havealerted him that this was not going the way he had hoped, prompting him towatch it more carefully.
Final thought for Jason– You should have instructed your client (in 2008) to also order a stop to the SEPP payments by old custodian, at the time (or just prior to) when he was requesting the transfer, which might have worked better than trying to do this by “timing” the transfer, it hopes thatno money was left in old account when next SEPP payment was due to be sent. KEN2010-12-09 14:19, By: Ken, IP: [184.108.40.206]
L7: Inadvertent Extra PaymentHello Jason:
Potentially not all is lost; just most. The commissioner has the authority under IRC 408(d)(3)(iii) to indefinitely stretch the 60-day rollover rule (esserntially permitting the put back of a distribution years into the future). This is best explained in Revenue Procedure 2003-16. Most of the successful resolutions under this procedure are evidenced by two factors: (1) an ubundance of written evidence that what occurred was an accident; (2) that what happended was contrary to the taxpayer’s intent usually evidenced by continued SEPP distributions in subsequent years.
Some good news; (1) the IRS will acquiese in their collections will seeking this resolution; (2) the cost to file under RP 2003-16 is modest(at least compared to a PLR) at $750 + or – in filing fee and likely $2500or more in professional fees to prepare the submission. A PLR would cost $15,000 in total.
Take a look and see if your client might fit this situation.
2010-12-09 15:09, By: TheBadger, IP: [220.127.116.11]
L8: Inadvertent Extra PaymentWELL HELLO BILL!!!
It’s been a long time and it’s great to finally hear from you! Hope all is well.
Jim2010-12-13 16:01, By: Jim, IP: [18.104.22.168]