IRS Audit

L1: IRS Audit
I started a SEPP plan for my wife in November, 2007. I was a tax-preparer back in the 1980’s so I felt confident that I could do this myself if I committed the time to educate myself. I spent several weeks doing research prior to developing the plan. I found that this web-site was my best source of information. Being able to read through the old posts was of tremendous value to me. I wanted to be sure that I didn’t make any mistakes that others before me had done.
In August 2009, nearly 2 years after starting the SEPP plan, I received an IRS examination notice pertaining to our 2007 tax return. I remember feeling very uneasy and intimidated about this. How can this be happening? I did everything correctly and I submitted a properly prepared Form 5329 with our tax return. Why are they picking on me?
Anyhow, to make a long story short, the outcome was good, but it took about 6 months to get it cleared up. I thought that I would write a chronology of what transpired in hopes that it would help others who may have a similar situation.
January, 2008 – I received a Form 1099R from Vanguard for the 1st SEPP distribution that occurred in November, 2007. The 1099R was coded as 1 – early distribution, no known exception.
February, 2008 – I filed our 2007 tax return with a Form 5329 claiming the exception code 2 (substantially equal periodic payments).
August 2, 2009 – I received the dreaded letter and examination report (Forms 4549 & 886-A) indicating that we owed an additional 10% penalty ($3122.70) plus interest ($222.65) because of a premature distribution from a qualified retirement plan. The report went on to state that the premature distribution did not qualify for any of the allowable exceptions, but if I felt it did then I should submit a corrected Form 1099R or a statement from the plan administrator (Vanguard) explaining why we meet the exception. It also went on to state that if they didn’t receive a response from me within 30 days then they would issue a Notice of Deficiency by certified mail.
August 3, 2009 – I wrote a response to the IRS explaining that the premature distribution was part of a series of periodic payments and therefore qualified for the exception to the 10% penalty. I included a copy of the SEPP Plan Documentation that outlined all of the factors used to create the SEPP plan. I also included another copy of the Form 5329 that was originally filed with my tax return. I sent this response via certified mail so I would have proof of when the IRS received my response.
September 2, 2009 – I received a letter from the IRS indicating that they were reviewing my response and that I should receive a reply from them by October 20th.
October 9, 2009 – I received a letter and examination report from the IRS (Forms 4549 & 886-A) indicating that they carefully considered my response and that their position was unchanged. I now owed them a larger payment because additional interest charges had accumulated. They went on to explain that the Form 5329 that I had submitted with my tax return was not acceptable documentation due to the fact that the exception code 2 that I claimed did not match their records from the 1099R which indicated a code 1. They indicated that I needed to submit Official Documentation from the Plan Administrator showing the distribution amounts, distribution dates, and a corrected 1099, if coded incorrectly.
I called the IRS and spoke to an Examiner. She was not familiar with section 72(t) and how it applied to Substantially Equal Periodic Payments. I asked if she could put me in touch with someone who understands 72(t) but she said she couldn’t do that. The only thing that she could suggest was that I send another response letter and I should request that it be sent to a Classifier۝ for review.
I wrote a response to the IRS and also enclosed another copy of the SEPP Plan Documentation. I also explained that Vanguard will only issue a code 1 on the 1099R and they have indicated that the taxpayer should claim the code 2 on a Form 5329۝. I requested that this response be forwarded to a Classifier۝. I sent this response via certified mail so I would have proof of when the IRS received my response.
November 12 , 2009 – I received a letter from the IRS indicating that they were reviewing my response and that I should receive a reply from them by December 29th.
December 14, 2009 – I received a phone call from an IRS Examiner. He stated that this matter could be easily cleared up if I could send them a corrected 1099R or some official looking documentation with Vanguard’s letterhead showing how they made the calculation of the Substantially Equal Periodic Payment. I explained to him that Vanguard will not change the coding of the 1099R and that Vanguard does not do the calculation. I went on to explain that I performed the calculation myself and that the factors I used were clearly outlined in the SEPP Plan Documentation that I had previously sent them. His response was that he had a copy of that documentation and he would have to take this up with his management.
January 9, 2009 – I received a letter from the IRS stating We are pleased to tell you that we did not make any changes to the tax reported on your return.۝
I expect that I’ll be getting an examination letter from the IRS sometime this summer for our 2008 tax return and then probably again every year for several years because this SEPP plan runs until 2015 when my wife attains 59-_. Does anyone know of a quicker way to resolve this in the future?
Thanks to all of you who maintain and contribute to this web-site. Your years of knowledge and experience have been very valuable to me and others.
2010-01-10 13:41, By: daiglel, IP: [216.80.125.206]

L2: IRS Audit”They went on to explain that the Form 5329 that I had submitted with my tax return was not acceptable documentation due to the fact that the exception code 2 that I claimed did not match their records from the 1099R which indicated a code 1. “”I called the IRS and spoke to an Examiner. She was not familiar with section 72(t) and how it applied to Substantially Equal Periodic Payments. I asked if she could put me in touch with someone who understands 72(t) but she said she couldn’t do that. “”I received a phone call from an IRS Examiner. He stated that this matter could be easily cleared up if I could send them a corrected 1099R or some official looking documentation with Vanguard’s letterhead showing how they made the calculation of the Substantially Equal Periodic Payment. “Can’t put you in touch with someone who understands 72(t)? 5329 form can’t override code 1? Send a corrected 1099R?Good grief! They don’t seem to even understnd their own tax forms and what they are used for! And where in the law does it say the calculation has to be done by the “plan administrator” on their letterhead? Have they never seen a SEPP case before? I don’t understand what they are doing with the information you sent them the first time – are they just looking for you to cave so they can get more money? Scary, but at least it worked out in the end. Yes, I too would like to hear if there is a faster way to resolve this, as 6 months seems ridiculous for something they should have dealt with many times before. I guess I better look forward to this since I’m starting my SEPP Jan 20th.2010-01-10 14:59, By: mikex, IP: [97.94.222.235]

L2: IRS AuditI too received that dreaded notice after my first year, butI was able to resolve quickly via a telephone conversation. I explained it was the first year of the series of substantially equal periodic payments and referred the examiner to my 5329 included with my tax return. She look it up and found the 5329 and said I would received an official letter in about 8 weeks closing the case. Sure enough7-8 weeks later the letter arrived closing the issue. If it’s of any consequence, I haven’t heard back from them since. 2010 will be my final year of the SEPP withdrawals. My only concern now is thatJan. 2009, I changed to the MRD (which is permissable of course) andhave done the recalculation forthis myfinal year (2010), and I am hoping this does not raise any red flags with the IRS. I certainly have my documentation ready if there should be an inquiry. Glad is all worked out for you as well. My guess is that you probably won’t hear back from them in future years just because you received an initial inquiry for the first year . Not sure if there is an easier way to resolve issues with the IRS, but I guess I was lucky to get an examiner who understood the 72(t) SEPP.It shouldn’t be a Hit or Miss, they should all be trained to understand the 72(t) rules.2010-01-10 16:22, By: meb24, IP: [71.162.242.53]

L3: IRS AuditJust reading that scenario is irritating, and it is obvious that those sending out many of these inquiries need to be re trained, if they ever were in the first place. And last week the IRS announced that they are being spread so thin with various projects that service is bound to suffer. Let’s hope in this case it means they won’t have the time to send out letters if they are too busy to try to understand the response. Has anybody noticed how many of the provisions in the healthcare reform bills will end up in the lap of the IRS, eg. the govt low income subsidy to buy health insurance?2010-01-10 17:52, By: Alan S., IP: [24.116.165.60]

L4: IRS AuditThe IRSwill also be in charge of penalty enforcement for those taxpayers that refuse to buyObama’s healthcare and choose to pay the penalty instead, or fail to report that they didn’t purchase Obama’s healthcare ansd have to be tracked down 2010-01-10 18:14, By: Gfw, IP: [216.80.125.206]

L3: IRS Audit”I explained it was the first year of the series of substantially equal periodic payments and referred the examiner to my 5329 included with my tax return. She look it up and found the 5329 and said I would received an official letter in about 8 weeks closing the case.”I don’t understand why they aren’t getting all the paperwork first before opening a case. Why are they wading into something that is just going to be a waste of time, given they can find all the paperwork up front? From reading the above, it just seems a computer is flagging a return, and the IRS clerk just assumes you have done something wrong without even looking into the matter. Why does she have to “find” or “look up” the 5329, which was included with your tax return to begin with? Why aren’t these forms linked to the entire year’s tax filing in the computer system? Does anyone understand what the heck is going on with these people?2010-01-10 18:37, By: mikex, IP: [97.94.222.235]

L2: IRS AuditI called Fidelity this morning because of this thread – (and a couple of other questions since I am starting my SEPP plan in 7 days – yay). I wanted to get some “official” Fidelity documentation for my SEPP folder that specifically states it is their official policy that they don’t code 1099r’s with anything other than a “1” for an SEPP withdrawl. They said yes, those kind of statements about this policy will come every year with the 1099 they send out. I said good, because I want that in case the IRS mistakenly claims I need to get it “recoded” by Fidelity. I don’t want to have to explain it in my own words.I also asked him about these types of audits, and he told me he has been in conference calls with the customer and IRS before, and that he has had to explain to the IRS agent that they don’t ever code 1099s other than “1” for SEPPs, and he said he’s even had to explain to the IRS investigator what the 5329 form is for and why that overrides the code “1” if a valid SEPP plan is in place.Unbelievable!2010-01-15 18:49, By: mikex, IP: [97.94.222.235]

L3: IRS Audit”They said yes, those kind of statements about this policy will come every year with the 1099 they send out.”
If you get something like that from Fidelity it would be a great thing to save. I’m not sure if Vanguard sends something like thatwith their 1099’s. I should be getting a 1099 for the 2009 tax year in a few weeks so I’ll belookingmore closely for it. Thinking back, if Ihad something like this, I could have attached it to my initial responseto the IRS and maybe this whole ordeal would have been closed out much sooner. Of course that’s making a huge assumption that they would actually look and understandwhat I send them!!!!2010-01-16 10:36, By: daiglel, IP: [71.54.171.214]

L4: IRS AuditYup, that’s a HUGE assumption!And it is another reason why less is often more when responding to the IRS. They often do not read the response closely, and if you give them too much hoping to head off the next question they might ask, then their attention is further diverted. While it makes sense to try to bring the uncertainty to an early conclusion for the taxpayer’s piece of mind, sometimes too much detail can actually prolong the process.2010-01-16 18:27, By: Alan S., IP: [24.116.165.60]

L5: IRS Audit”While it makes sense to try to bring the uncertainty to an early conclusion for the taxpayer’s piece of mind, sometimes too much detail can actually prolong the process.”Alan,What is the maximum amount of information you would provide the IRS upon first receiving an audit letter?Something like “I am executing an SEPP on my IRA, here are the numbers used for the calculation, and here is a copy of my 5329”? Now leave me alone?2010-01-16 22:34, By: mikex, IP: [97.94.222.235]

L6: IRS AuditI had the same issue. My SEPP had been distributing since 2000. I think Vanguard changed the code number in about 2007 because that was the first year I had an issue. I coded Turbo Tax with a 2 even though Vanguard coded 1099R with a 1 and it caused Turbo tax not to generate the 5329 form.2010-03-06 02:37, By: Sonray, IP: [66.141.234.112]

L7: IRS AuditWhile many people try to deal with the IRS themselves, they do not understand that there is little or no logic to tax laws, IRS regulations and procedures, and that most IRS agents are clueless about most tax provisions, especially SEPP 72-T and NUA.If any of you hadused a professional tax preparer originally, or retained one when the audit arose, then the tax professional should have been able to get it resolved in about 15 minutes thru a special department called “PRACTITIONER PRIORITY SERVICES” (PPS). We can contact them on issues like this. Worst case, if they cannot resolve the issue within 30 days, then we, or you, can contact “TAXPAYER ADVOCACY SERVICES” (TAS), and they always get it resolved within 30 days, as they are required to do.Tax professionals include ENROLLED AGENTS, CPAs, AND PUBLIC ACCOUNTANTS. Some have more experience than others in SEPP 72-T and dealing with the IRS. In addition, the gurus on this website whocould have probably guided you with less angst, especially on how the first agent who obviously was unqualified to handle your cases.2010-03-06 03:33, By: dlzallestaxes, IP: [173.49.30.37]

L8: IRS AuditA suggestion: If you are going to be starting a SEPP, and will be needing to open a new IRA with a new custodian, then I strongly advise choosing Schwab. They code their 1099R with a code 2 so no other form 5329 needed and less potential for a red flag to the IRS. Just my opinion, Thanks2010-03-10 00:51, By: Janet R, IP: [72.172.43.225]

L8: IRS AuditA suggestion: If you are going to be starting a SEPP, and will be needing to open a new IRA with a new custodian, then I strongly advise choosing Schwab. They code their 1099R with a code 2 so no other form 5329 needed and less potential for a red flag to the IRS. Just my opinion, Thanks2010-03-10 00:52, By: Janet R, IP: [72.172.43.225]