IRS exam by mail

L1: IRS exam by mailI have been taking SEPP’s from my IRA since August 2002. In 2003 I took an additional distribution of $10,000 in order to cover unexpected major dental work. I received 2 1099-R forms for that year from my custodian. The distribution code on the one for my SEPP’s was a “2” and the one for the $10,000. was a “1”. I paid the 10% penalty on the $10,000with my 2003 tax return. In 2004, I received only my regular monthly SEPP’s. Again I received 2 1099-R forms. One was for 11 months of my SEPP’s and coded “1”. The other was for 1 month SEPP and was coded as a “2”. When I spoke to my custodian they said that I no longer qualified for 72t status after taking the $10,000 distribution.My tax preparer filed a 5329 with my 2004 tax return correcting the “1” to a “2”. In Nov. 2005 I received an exam by mail notice from the IRS for my 2004 return. They are requesting a payment of the 10% penalty for the 1099-R that my custodian coded with a “1”. My tax preparer and I called the IRSand were advised to have my custodian send a letter stating that the amount paid was part of my SEPP’s. My custodian would not issue a corrected 1099-R however did send a letter that I sent on the the IRS stating that I received equal monthly payments of … in the year 2004 as SEPP. I have now received another letter from the IRS wanting documentation that shows I meet one of the exceptions. Again, my tax preparer and I called the IRS. This time they have recommended we write a letter explaining why my custodian reported the premature distribution code “1” for 2004. Should I send this letter? In December 2005 I was re-enrolled in the SEPP program. I received 1 1099-R for 2005 showing my total monthly distributions for 2005and it is coded as a “2”. This has been and continues to be incredibly stressful. Do I owe the 10% penalty for 2004? Would it be of any benefit to seek legal counsel? 2006-02-17 21:04, By: windy, IP: [68.205.30.182]
L2: IRS exam by mailHello windy:
For the moment I am going to assume that the extra $10k taken in 2003 was from the same IRA as your SEPP distributions. If this is wrong, please correct me.
Assuming I am right, this is ugly. Actually there is probably nothing wrong with your 2004 distributions, but there is something wrong with your 2003 distributions. In order to satisfy the IRS with respect to your 2004 distributions you will need to tell them that you started in 2002 and then they will look at all the distributions from inception.
I suggest you do two things ASAP:(1) retaim competent counsel; either a tax CPA or tax attorney immediately; (2) usingyour counsel, write, never call, the IRS.
TheBadger
wjstecker@wispertel.net
2006-02-17 21:22, By: TheBadger, IP: [66.250.23.25]

L2: IRS exam by mailI can’t offer the kind of expert advice that TheBadger and others might have on this dilemma, but I can say to everyone who reads these posts in contemplation of starting a 72t that this shows how critical it is to have an “extra” IRA account (and mine is even with different custodian) that is not involved in the SEPP universe you declare, just in case an emergency occurs. (It is easily done by breaking up your single IRA before starting a SEPP.) Then, you can take the needed emergency money from the non-SEPP IRA, and only owe the 10% penalty on that amount, without dragging in the issue of busting your SEPP. If the IRS were to question you, it would be easy to show that you did not bust your SEPP.I will have 3 IRAs when I start my 72T in the next month or two, with the major one being used for the SEPP till I am 60, and either of the two smaller ones able to either start a second 5 year 72t, or be used for any individual”emergency” withdrawals (and 10% penaltys) if needed, while not disturbing the main IRA SEPP eligibility. This was done from the knowledge obtained from the posts on this site, and fromEd Slott’s www.irahelp.com site and his book. I wish you luck with the IRS.KEN2006-02-18 06:20, By: Ken, IP: [151.199.43.6]