IRS examination report

L1: IRS examination reportI started my72t planin January 2007 (at age 55) and have been receiving my regular monthly distributions as expected.I used this site and purchased Bill Steckers book to help myself set up the plan properly. With that said, I just received a an examination by mail from the IRS saying that I owe the 10 % penalty for an early distribution. I have my IRA with a major firm that will only mark a code of 1 on your 1099 form if you are under 59 1/2. This is what I believe triggered the examination. I did file Form 5329 with my tax return (exemption 2) When I called the IRS number that they listed, I had the distinct impression that the first person never heard of 72t and the second and third phone calls all ended in “just send in the proper documentation and will go from there” My question is. Since I have a self administered plan, what would be the proper documentation. I can not get a corrected 1099 as they suggest. I did produce a letter of self determination that I took from Bills book and I have the IRS tables where I used the proper interest rate I also have copies of my December 31st, 2006 IRA balance thatI used in the calculation. I do not believe that there is any thing wrong with the plan, it is just that my 1099 is marked 1 and they are hung up on that. Any thoughts would be appreciated.2009-01-18 16:17, By: John 52, IP: [99.142.1.17]
L2: IRS examination reportHello John:Youy just seem to be lucky enough to hit the IRS lottery for examination of IRC 72(t) plans. That said, I would advise, in particular regard to this subject area:1. Never converse verbally with the IRS.2. Send them a responding letter within the next 30 days that says three things: a. You are not responsible for the acts of your trustee. Also, your trustee is wrong, If the IRS has an issue with 1099R coding, take it up with the trustee, not you. b. You have an IRC 72(t)(2)(A)(iv) compliant distribution plan and here is the evidence — here is where you prove up your IRA balance(s), interest rate assumption and life expectancy. c. Therefore, remove the 10% surtax as well as any related interest and penalties AND respond in writing that you have done so. Your ever loving taxpayer, John.This should take care of it. Unfortunately, the IRS rarely complies with your final request; e.g. an affirmative closure to the issue; instead, you will most likely hear nothing.TheBadgerwjstecker@wispertel.net2009-01-18 16:53, By: TheBadger, IP: [72.42.109.65]

L2: IRS examination reportSomething similar to what Bill just posted. In terms of documentation I would do something like…

Include a copy of the 5329 filed with your return
If you reduced the plan to writing (like the sample that we have posted on the site) include that or include something that shows how the payment was determined and the interest rate used and why it complies with IRC Section 72(t)(2)(A)(iv) and Rev. Rul. 2002-62
Include the statement used to determine the initial balance
Include the end of year statement outlining that the distributions taken matched the planned distributionsThis may be overkill, but last time I got audited I received a bill for about $19k for a mistake that had been made in the reporting by the Treasury Department to the IRS. I attached a beginning statement, an ending statement and a detailed explanation as to why I owed nothing. About 4 weeks later, I received a letter closing the file and stating that I owned nothing.

2009-01-18 17:05, By: Gfw, IP: [216.80.125.206]

L2: IRS examination reportI’ve asked, and my trustee won’t code the 1099r a “2” either, if I do the 72t plan. They said they have nothing to do with those plans and can’t code the 1099r a “2” because once I take out the money they cannot be responsible for me and my 72t calculations or what I do with the money. It just comes out of my IRA account into my bank account. After that it’s my problem.So if this is a “mistake” then I’d surely like to know how to force my trustee to code the 1099r properly if I do the 72t plan.2009-01-19 23:42, By: mikex, IP: [71.90.162.26]

L3: IRS examination reportYou can’t force the IRA Custodian/Trustee to code it with a code of ‘2’ – most quit doing it several years ago. In addition, a code of ‘2’ guarantees you nothing. An IRA is always between the owner and the IRS.Merely complete form 5329,file it with your return and keep good records.2009-01-19 23:49, By: Gfw, IP: [216.80.125.206]

L3: IRS examination reportHi, Mike:Yeah, that was the same silly advice I received from the IRS regarding my 1099R coding. Somehow, I HAVE to think that the IRS knows that custodians aren’t going to issue an updated 1099R, no matter what the customer requests. They should stop telling people this as it is completely useless.It is a bit funny that the same custodians who refuse to code a 1099R with a 2 for a 72t plan do not mention that little fact BEFORE we hand over our money. It doesn’t matter that we fill out their 8 page SEPP application form, do a direct 401k plan to IRA rollover, and then request regular periodic payments of all the same size. Somehow, they are still left scratching their heads and wondering whether or not we actually have 72t plans. DUH!As has already been mentioned here, an IRA and a 72t plan are 100% between the taxpayer and the IRS. The custodian does not, has not, and probablycan not “guarantee” that the 72t plan exists or that it was done correctly. As far as I know, I have never asked them to guarantee my 72t plan. Somehow, they think that if they code a 1099R with a 2 in box 7, they are responsible for it being correct. I have no idea why they think this but apparently they do. I have read a lot of IRS rules, regs, etc. and nowhere in any of it does it mention custodian responsibility for 72t plans or IRAs. This HAS to be some off-the-wall mumbo jumbo provided by custodian’s legal departments. No one else could be this “creative”.2009-01-20 01:32, By: Ed_B, IP: [24.20.24.188]

L4: IRS examination reportWell, I’m just a dumb engineer, so my plan is to have my CPA guy do all the calculations and write me a letter that says to all the world that the SEPP was done properly. Then if Mr. IRS sends me a love letter I’ll trot it on down to said CPA and have him write them back. I figure it’s worth the money to have a guy on the sidelines to back me up. What the hell do I know about this stuff? Well, truthfully quite a lot since reading this forum, but I am not a professional :-)2009-01-20 01:42, By: mikex, IP: [71.90.162.26]

L5: IRS examination reportDon’t sell yourself short, Mike. I worked in the chemical industry for 30+ years and I met and worked closely with quite a few engineers. Most of them were pretty sharp guys. Still, having a pro on your side does give a guy some confidence that things were done correctly. Pros make errors sometimes too but the odds of that happening are reduced a lot when they know their stuff. Hopefully, your guy does and your plan will be just fine.I considered this approach as well but decided to do it myself. I found a brochure on the Vanguard web site that described setting up a SEPP plan pretty thoroughly. I went through the amortization calc using their worksheet and got a number for my annual SEPP distribution. I then used the same data and the SEPP calculator on this web site to make the same calc. The numbers I got agreed to within about $0.50 onthe $33k annual figure. I figured that was close enough to the same to not worry about it. All of the numbers we use in filing our taxes are rounded to the nearest dollar and the IRS has not had a problem with this in the 30+ years we’ve been doing it this way, so I figured that it would be OK in my SEPP as well.I started my SEPP in March 2005, so it has about 14 months to go until it ends. So far, so good. :-)2009-01-20 05:26, By: Ed_B, IP: [24.20.24.188]

L2: IRS examination reportHi, Just wanted to let you know I got a similar notice from IRS just about this same time last yearstating I owed the 10% Penalty. My plan was started in Jan. 2006 & the letterrec’dJan. 2008 was for that first year (2006). I called them immediately. Spoke to a knowledgeable representative–if you can believe that. I explained it was a SEPP — 72T & referred her to my 5329. She looked it up & said all was okay, and I would received a letter in about 8 weeksthat the case was closed.Just about8 weeks later, as the representative stated,the letter arrivedclosing the case.I did not have to send any documentation — my phone call was enough — maybe I was just lucky to get some who know what I was talking about. Hopefully, I don’t see another letter because they can be unnerving even though you know you have set up the plan properly.I’m sure after you send in your documentation the situtation will get resolved and they’ll close your case as well.Good Luck!2009-01-20 03:11, By: meb24, IP: [76.124.253.181]

L3: IRS examination reportYikes. I don’t get something here. If the 1099r is in your return, and the 5329 is in your return, then why are they looking into the issue at all? If all the forms are included, why would they demand the 10% penalty? Why would a phone call make them back off without any additional information? Didn’t the person who first processed the tax form see the 5329? The whole thing seems to be after the fact bureaucratic hassling. Isn’t there some way to tell them in your “file” before you start, that you are doing a SEPP and to expect the 5329 forms coming for years and not to freak out over it all?It seems to me that the whole thing should have been designed from the git-go differently in the law. The SEPP plan should be submitted to the IRS and approved BEFORE you start it, so at that point they wouldn’t have to look into the matter like that. Have an official, legal, calculator on the IRS site. They see the 1099r and the 5329 in your return and would know that things are OK. In other words, it sounds like the tax form, the 1099r, and the 5329 STILL are not enough to satisfy them.2009-01-20 12:44, By: mikex, IP: [71.90.162.26]

L4: IRS examination reportmikex… I think you are making something that is really kind of simple overly complex. I guess thefirst thing is don’t spend time worrying about “what should have been” – it wasn’t and it very likely won’t be changed. Rather look at it as something that, if you follow the rules, gives you an additional planning option.Over the years, there have been a lot of people who have armed themselves with the information (including the calculators)on this siteand possibly Bill’s book and have implemented their plan with no problems. Just start with a design and then follow the design during the plan. As the plan starts and progresses, keep good records (you shouldfor all tax matters not just a SEPP) and the plan will probably have no problems. If you doget a letter, merely respond (see Bill’s post and my post above) and if you followed the plan design, you will have no problems. If you fail to follow the design, the best CPA around isn’t going to be able to help. As stated earlier, an IRA is between you and the IRS.2009-01-20 12:58, By: Gfw, IP: [216.80.125.206]

L2: IRS examination reportI have a 72t that meets the rquirements in october. I wqnted to transfer my money to another custodian ASAP. I check with the custoduan regarding continuing my 72t with them (submitting the sepp forms with the original start date. They are saying they don’t do the forms and that i should just request montly payments for the same amount. They also said that I can show distributuin code 2 for excepiton.Just feel a little nervous. Any advice would be appreciated2009-01-20 17:46, By: keani4me2000, IP: [71.202.85.56]

L3: IRS examination reportI guess you mean that you started your plan last October. Generally, a change of custodians increases the number of items for you to watch very closely, but if there is good reason to change, do it by direct trustee transfer so you can preserve your rollover in case you need it for corrective purposes.The new custodian is another of the increasing majority that does not want to incur any responsibility for your plan and will code it as an early distribution. This is so commonplace now that it should not be used as a reason to avoid that custodian if all else is in order.You will need to double check your total annual distributions from both custodians to make sure that the annual total is correct. If you set up monthly payments, be sure to make them payable early in the month so you have a chance to make a December correction if you need to to safeguard your plan. You will also need to file a Form 5329 to claim the 72t penalty exception because one of probably both of the custodians will code your 1099R as an early distribution, so that much of the advice you received is correct.I would also be sure that all your original calculations from last October are well documented and you have a copy of the statement you are using for your original account balance. As you know, last October was a month of massive losses in many investments and there were huge reductions in account values. Hopefully, you used a reasonable account value on which to base your initial balance.2009-01-21 04:46, By: Alan S., IP: [24.116.165.60]