incorrect distribution from SEPP
L1: incorrect distribution from SEPPI have a client who started a SEPP December 2014 and has taken monthly distributions that were calculated incorrectly. The result of this is that she has received more from the SEPP than she should have received if calculated correctly.
If she now begins taking monthly distributions of the correct amount for the SEPP, does that constitute a change that will subject all prior payments to the early withdrawal penalty? Can she pay the early withdrawal penalty on only the excess amount that was distributed and begin taking the correct monthly distribution?2016-06-17 00:13, By: ltcpa2016, IP: [184.108.40.206]
L2: incorrect distribution from SEPPIn this situation, the plan wasinvalid from the beginning, and the 10% penalty applies to all distributions taken to date. If client still needs penalty free distributions going forward, they need to start a new plan from a current new calculation. Distributions cannot revert to the former correct amount. The new plan must last until the longer of age 59.5 or 5 years from the date of the first distribution under the new plan. The retroactive penalty should be reported on Form 5329 for 2016, but include the total penalty back through Dec, 2014. The penalty will apply to the entire distribution, unless she qualifies for a different penalty exception other than the SEPP exception.
2016-06-17 00:22, By: Alan S, IP: [220.127.116.11]
L3: incorrect distribution from SEPPThank you for your response. One followup question – Since we are only half way through 2016, why couldn’t the client correct the distributions for the remainder of 2016 so that the annual total for 2016 would be the correct distribution, thereby avoiding the penalty for 2016? 2016-06-17 14:32, By: ltcpa2016, IP: [18.104.22.168]
L4: incorrect distribution from SEPPAs pointed out in the first response, the plan was invalid from day one therefore it is also invalid in 2016. You could start a new SEPP today, but any distributions taken before today would be subject to the 10% penalty.2016-06-17 15:39, By: gfw, IP: [22.214.171.124]
L5: incorrect distribution from SEPPIf you give us the figures, we might be able to offer a solution. What was the balance she used, date of birth, the date of the first distribution, the interest rate used, the amount she was withdrawing, and the correct annual amount ?
It is possible that if the amount was close to the correct figure, then an adjustment of the interest rate might give the correct result. If the amounts are too far apart, then Alan’s response is correct that all distributions from the beginning until now are subject to the 10% penalty.2016-06-17 17:04, By: dlzallestaxes, IP: [126.96.36.199]
L6: incorrect distribution from SEPPPersonal opinion… if you change the assumptions (like the interest rate) retroactively, the plan is still a bust.
Dlz… do you have anything from the IRS to the contrary?2016-06-17 18:43, By: gfw, IP: [188.8.131.52]
L7: incorrect distribution from SEPPSometimes people, especially taxpayers without professional guidance, pick a figure of how much they want distributed, without realizing that there is an actual calculation to be made.
In that case, they have not really selected an interest rate, and may not have actual documentation. Then they find out that they need to support their calculation. In that circumstance, he would be actually developing the documentation for the first time.
Another possibility could be that they took a balance too far in the past, or took part of the balance without separating it into 2 accounts. They may also have taken a wrong interest rate by either reading the wrong month.
The IRS has been more lenient in some other types of cases, such as missed or wrong RMD distributions, and omitted S elections. Depending upon the specific facts in this case, it might be worth a try to see if the IRS might waive the penalty.
The original posting indicated that it was a client, so we have no way of knowing who made the original calculation. If it was someone other than the taxpayer, then he/she might have recourse for that person/firm to reimburse the penalty.2016-06-17 20:50, By: DLZALLESTAXES, IP: [184.108.40.206]
L8: incorrect distribution from SEPPThanks again for the additional responses. It was the taxpayer who picked an amount without realizing the need for supporting documentation. I had not considered possible IRS penalty abatement but I will request. Would you include the penalty on the return and then request penalty abatement or exclude the penalty with a reasonable cause explanation on the return?
Thanks again!2016-06-17 21:42, By: ltcpa2016, IP: [220.127.116.11]
L9: incorrect distribution from SEPPIf you give us the info I mentioned in my response, we can see how close, or wrong, the amount distributed was to the correct amount.
It is possible that even though she took more than the allowed amount for the number of months in 2014, she may have taken less than the TOTAL ANNUAL AMOUNT that she was allowed to take in 2014. Similarly, we can look at the 2015 figures. If so, the IRS might waive the penalty based upon the explanation if we give them these figures.2016-06-17 23:28, By: dlzallestaxes, IP: [18.104.22.168]
L10: incorrect distribution from SEPPRegarding the above situation. I have a similar situation. Do you have any IRA documentation you can reference that I can use to show client?2016-06-20 19:26, By: Blewish, IP: [22.214.171.124]
L11: incorrect distribution from SEPPThe IRS has never issued guidance regarding the form of documentation or the timing of it, therefore a taxpayer is somewhat subject to the judgement of the IRS agent reviewing the tax return and 1099R forms. The main question here is whether actual compliance by accident or retroactive documentationwould override the intent of the taxpayer on the day the first SEPP distribution was requested. A taxpayer in this situation is therefore confronted with a tough decision, whether to wait for the IRS to question the plan and piling up more distributions potentially subject to penalty, or to reform the plan in the first year if they can determine a window of compliance. Once the first calendar year ends, this is no longer possible since the distribution amount for that first year is locked in. If taxpayer instead decides to self report a busted plan before the IRS acts, and thereby cutting their losses, then PLR 1999 09059 and Pub 590 B indicate that the recapture tax should be reported on Form 5329 for the current year, accumulating the total distributions back to day 1 that are now subject to penalty. Once this decision is made, it should also be determined if a new SEPP plan will be initiated under which current distributions can again qualify for the SEPP penalty waiver. The IRS will probably bill late interest on the penalty amount paid late based on the prior year in which that portion of the total penalty was due.2016-06-21 19:02, By: Alan S, IP: [126.96.36.199]