L1: IRS GreetingsGood Afternoon. Today I received my Happy New Year notice from the IRS that I owe taxes from my 2008 return. We started our 72t in 2007 and even though we filed 5329 forms claiming the exemption under 72t for our payments from our 401k. They are telling me I must appeal to the tax court in Washiongton DC. There is no option other than tax court according to the letter. I can appeal the ruling to the court if I file in 90 days from the date of the letter. Just so I get it right what should I file with the court? I did all my calcluations based on the calculator on this web site and have all my documentation for the plan based on this sites on line forms. What a way to start 2011.2010-12-31 21:45, By: Rick, IP: [22.214.171.124]
L2: IRS GreetingsIf you had used a tax preparer, then he could contact the Practioner Priority Service ( PPS ) if you gave him a signed 4868 IRS Power of Attorney. I get these from all of my clients when I prepare their tax returns, and I amost always have any issue resolved before they get home for dinner.
Since you prepared your own return, you should hire an enrolled agent, tax accountant or tax attorney, and sign a POA. He should be able to get it resolved easily, without going to Tax Court, which is very expensive. His intervention should not be too time consuming or expensive, probably $ 500-$ 1,000. The IRS is wrong, as usual, almost always in these situations.
Worst case if initially unsuccessful with PPS, he can then go to Taxpayer Advocacy Services ( TAS ), who usually resolves issues within 30 days.
In 50 years of practice, I’ve never heard of the initial notice indicating tax court.2010-12-31 22:04, By: dlzallestaxes, IP: [126.96.36.199]
L3: IRS GreetingsRick,
You set the plan up directly from the 401k of a prior employer, and not an IRA? At what age did you separate from this employer?2010-12-31 22:36, By: Alan S., IP: [188.8.131.52]
L4: IRS GreetingsDlz, The notice is clear that I must petition the tax court in Washington DC. This is the first notice that I have received that there was a problem with my tax returns from 2008. Incredible I live in upstate NY. I used a local branch of HR Block. The person who did my taxes has been doingtaxes for 30 years and my personal taxes for 10 years. I called the office today late this afternoon after receiving my notice by certified mail but being New Years eve the office was already closed. I left a voice mail. The amazing thing is I must request in writing a petition form from the Court in Washington DC in order to file the petition for review. All this has to be completed in 90 days from the date of the letter.
Alan, I and my wife separated from service at 52 and started our 72t on the day we turned 54.5. The plan allows up to four payments/year but we always take our paymentone time lump sum in November. They are claiming we owe almost $11,000including two yearsinterest and penalties. We did take partial payments in our first year in 2007, so 2008 was the first year of full payments. Maybe this is what set them off. I’ll be writing a letter to the Clerk of the court this evening requesting the appropriate forms.
What should I file with the court to prove I’m doing a 72t? Just the documentationI put together when we started this?
Thanks for the quick replies.
2011-01-01 00:43, By: Rick, IP: [184.108.40.206]
L5: IRS GreetingsRick,
I just wanted to confirm that the plan is set up with the 401k and that is apparently the case. That’s OK but you sacrifice some control vrs using an IRA. Separating at 52 you could not have used the age 55 exception anyway, but wanted to determine if that was a possibility.
A new concern – you last post includes some “joint” wording with respect to this plan, but all retirement plans are individual. You could set up a 72t with your plan and your wife could set up a 72t with her plan, but you cannot combine the plans or the plan balances for both accounts. This would have busted the plan if that is what happened.
Did you file a 5329 changing the distribution code to show the 72t exception (02)? This is another frequent omission that triggers an IRS response and in that case you usually just have to provide documentation of your plan calculations to take care of the problem.
As for the tax court issue, will leave that one up to dlz as I am not conservant with that facet of the the inquiry.
2011-01-02 04:04, By: Alan S., IP: [220.127.116.11]
L5: IRS GreetingsAlan,
In this post, Rick said, “We did take partial payments in our first year in 2007, so 2008 was the first year of full payments.”
Does the 72(t) provision provide for taking a partial payment in the first year of a SEPP plan? That is, if you take your first distribution in the 4th quarter of a calendar year, are you are allowed to take only 25% of the annual payment for that year? If that’s not allowed, then it might explain why the 2008 return triggered an audit. If they took a partial payment in 2007 and a full payment in 2008, then the two distributions won’t look much like a series of equal payments.2011-01-02 06:40, By: knupug, IP: [18.104.22.168]
L6: IRS GreetingsStub-years have always been allowed in the 1st plan year.
For example, if the plan starts in July, the SEPP plan could distribute the full annual distribution or 50% of the full annual distribution – either would be OK. In the 2nd andsubsequent years, the plan would distribute the full annual distribution.
However, from the information given in the initial post, it appears the IRS isn’t questioning the 2007 partial distribution. I also agree with DLZ that I haven’t seen (or for that matter heard) of the IRS mandating tax court in the initial request for additional funds owed. 2011-01-02 11:12, By: Gfw, IP: [22.214.171.124]
L7: IRS GreetingsAlan, my wife and I both have 401k’s. We used the balance from each individual account to calculate our payments and did not combine anything. In reviewing my tax forms there is a 5329 form in the packet foreachof us claiming an 02 exception.The first year we did a stub year payment. My wife took hers in July so we did 50% of the total annual distribution. I took my first payment in September so I took 1/3 of the total annual distribution. In 2008 we took one full year payment and took that payment in November of 2008. I tried to do everything correctly. I have all my documentation as to what I did so hopefully this will eventually go away after I explain it to them and they will leave us alone.
GFW, this is a quote from the second paragraph of the letter ” If you want to contest this determination in court before making any payment, you have until the Last Date to Petition Tax Court (90 days from the date of this letter or 150 days if the letter is addressed to you outside the United States) to file a petition with the United States Tax Court for a redetermination of the amount of your tax”.
It seems clear to me that they are telling me I have to file with the Court. On Monday I plan to call the (866) 897-0177 number listed on the letter and try to talk to someone while I await the response from the Court Clerk to my request for petition forms. I was hoping to avoid all this but isseems that it must be my turn in the barrel. AfterI talk to someone on Monday I’m hoping that they give me another option than going through the court process.We’ll see.2011-01-02 11:41, By: Rick, IP: [126.96.36.199]
L8: IRS GreetingsGood luck and please keep us informed of the outcome.
2011-01-02 11:45, By: Gfw, IP: [188.8.131.52]
L9: IRS GreetingsFolks, not to throw a monkey wrench into the conversation but in reviewing the letter from the IRS closer they have also included the proceeds from my former employer’s pension plan. I was having trouble figuring out where they came up with their ten percent additional tax number and when I reviewed my tax return I realized that they want ten percent for proceeds from my monthly pension also. The 1099R form from the former employer has a code of 7 in box 7 of the form which designates a Normal Distribution. I think that they have screwed this up all the way around. The annual pension accounts for just over 10% of the total additional tax they are requesting. Apparently they have disregarded everything that was filed with them. On my form from HR Block they said that they saved me money because I qualify for the penalty exemption.2011-01-02 14:28, By: Rick, IP: [184.108.40.206]
L10: IRS GreetingsRick,
“I think that they have screwed this up all the way around.” No doubt!
You seem to have done things properly per your posts, so it is probably just a matter of explaining it all to someone at the IRS more informed than those who initiated this action. We hear plenty of cases that eventually get resolved favorably when proper documentation is presented. 2011-01-02 19:24, By: Alan S., IP: [220.127.116.11]
L11: IRS GreetingsI believe that H & R Block “guarantees” their work, and is supposed to handle all IRS notices. ( I’m not sure about audits.)
Check your documents from them for the applicable year.2011-01-03 02:10, By: dlzallestaxes, IP: [18.104.22.168]
L10: IRS GreetingsRick:
You may be right that the pension plan distribution is triggering the IRS problem. What type of distribution option did you and your wife take? (I think I’m reading it right that you and your wife worked for the same company.) Did you take a “lifetime” option or just a “certain number of years,” like for 10 years, to deplete the account? This can have an impact on how the IRS treats these distributions. I’ll ask GFW to respond based on your reply to my questions sincethis type of distribution is really his expertise.
Also, did you receiveseparate Form 1099-R’s for the pension AND the K-plan distributions? If the company combined both into one form then you really do have a mess and they need to quickly make changes for the future and corrections for the past.
Jim2011-01-03 14:56, By: Jim, IP: [22.214.171.124]
L11: IRS GreetingsJim, the pension is a lifetime payment. They will pay the same amount monthly until the day I or my wife dies. Yes we both did work for the same corporation. No they did not combine the 1099R’s. They come from two completely different sources not related to each other, other than they both have a relationship with my former employer.
Went to see my tax advisor this afternoon and signed a 4868 POA so that they can handle it. I gave them copies of my 72t plan materials. She is under the impression that I have nothing to worry about. She has had 2 or 3 other clients get these go to court notices but for different reasons than mine. Some had received previous notices and ignored them, some like me, it was their first contact from the IRS. I have left it in their hands for now. They will have one of there enrolled agents contact the IRS and they are sending them a letter. I hope this works, I really don’t want to pay $11,000 of taxes that I shouldn’t owe, because if this fails they’ll get me for at least two more years.2011-01-03 20:46, By: Rick, IP: [126.96.36.199]
L12: IRS GreetingsRick:
Based onthe description of your pension payout, I don’t think that is the problem.
I think this is going to be one of our “run-of-the-mill, IRS computer generated letters” that SEPP Plan participants seem to be garnering of late. Once a real person at the IRS reviews your supporting documents then the problem seems to quickly go away.
The IRS knows about this site and they even refer tax payers here when they get 72(t) questions so I don’t think you have anything to worry about … except for the fact you are having to do the “hoop dance.”
Jim2011-01-03 21:55, By: Jim, IP: [188.8.131.52]
L13: IRS GreetingsFolks, I am now being told that you can only do a 72t from an IRA. Mine is currently from a 401K. Can you assist me with where in the IRS Code it is permissible to do a 72t from a 401K.
Thanks2011-01-07 19:57, By: Rick, IP: [184.108.40.206]
L14: IRS GreetingsHello Rick:
I do not know who you are hearing from; but, it is utter nonsense. IRC 72(t) specifically references IRC 4974(c) as the source for a “qualified retirement plan”. A QRP generally includes any and all plans qualified under 401 of the code including 401(k) plans.
email@example.com 01:32, By: The Badger, IP: [220.127.116.11]
L15: IRS GreetingsBadger, I found the information on the IRS web site in publication 575. I knew that you could do a 72t on a 401k but earlier today I was told I was mistaken by the person who did my income tax. I have since corrected her and I think she now agrees. She was told by the accounting side of the business that you could only do it on an IRA. The accounting side of the businesssuggestion was that I pay the bill and move forward. I told them in no uncertain terms that that was not going to happen. I don’t owe the money so I won’t pay the bill. I am now looking for a tax attorney to pursue this case and I am also going to be looking for a new tax preparer. I may be stuck this year but I probably won’t be using them again after this year. Thanks for your input and your website.2011-01-08 02:30, By: Rick, IP: [18.104.22.168]
L16: IRS GreetingsYou are not stuck with using the same tax preparer this year as last year. I, and most preparers that I know, would be happy to add a new client, even at this late date.
This year you are actually in luck because the IRS has just announced that only taxpayers who take the standard deduction will be able to file their tax returns as of 1/15/2011. This includes e-filed ans well as paper 1040s with standard deductions. More importantly for professional tax preparers, the IRS announced that because of the late new tax act by Congress, the IRS will not have their computers programmed for these new tax laws until MID TO LATE FEBRUARY !! This affectes almost all of the e-filed and paper tax returns that professional preparers are involved with.
In addition, the 1099-DIV, INT, and B forms that are issued by brokers and mutual funds have not been PERMANENTLY DEFERRED until 2/15 every year ( rather than being mailed on 1/31. This situation started about 5 years ago when “QUALIFIED DIVIDENDS” ere established in the tax laws. As a result, companies have to determine if they had a loss, in which case the “dividends” that they paid during the year might have to be “reclassified as ” Return of Capital” or “Non-Eaxable Dividend Distributions”. Once the company makes a change like that, then the brokers and mutual fund companies have to issue “CORRECTED/AMENDED” 1099 forms. Investors, and practitioners, have had to deal with getiing these updaed forms. The first year many taxpayers received up to 5 updated forms, up to as late as 4/15, and some even later. ( I was quoted in the Wall St Journal that first year warning taxpayers and practitioners in mid-January that this was going to become a problem, ad to delay filing any tax returns for investors until after 3/31.) The IRS finally listened to me last year, but only by deferring the 1099 deadline to 2/15, rather than 2/28. As a result, there was a significant reduction in the number of these updated forms, as well as in the number sent by the same broker or mutual fund to the same taxpayer.
Furthermore, the 1040 tax filing deadline this year is 4/18/2011, but I’m bot telling my clients that it is 3 days later. I have a 3/15 cutoff date for assuring timely filing. If they get me their info after 3/15, I’ll try to get it done on time, but I will not guarantee it. They might have to go on extension, with 10 million other taxpayers who are not my clients. And there is no truth to the myth that extended tax returns are more subject to audit. The IRS does not have enough manpower to audit that many tax returns.
So, find another tax preparer THIS WEEK. Give him/her your 2009 tax return so he can “proforma” it, and provide you with a 2010 tax organizer. ( I always require the last 3 years, and look at the oldest one to see if there might be any errors, and possible refunds, before the statute of limitations expires.)2011-01-08 15:45, By: dlzallestaxes, IP: [22.214.171.124]
L17: IRS GreetingsWell last night I called the IRS after I completed getting all my paperwork together. It was quite an experience. Previously my tax preparer had sent information to them so I was waiting to hear from them. Since I hadn’t heard from them I decided to call. The person at the IRS didn’t have any clue as to what a 72t was. They told me “there are no exceptions if you are under 59.5”. When I told them I had filed a 5329 form for each of us her reaction was “I never heard of that form”. Then she put me on hold to talk to her Supervisor. She came back on the line and offered to have someone call me back who understood this better. I asked to talk to her supervisor. She said that the Supervisor could not answer my questions either. I then said well she has a boss let me talk to them. Well to make a hour long story short, I coildn’t get past this person who new nothing. She asked me to fax to them the paperwork again to see if they could tie it all together. She said she had no access to what had already been filed and that they probably had just misplaced the 5329 form that she had never heard of. Well the clock is ticking. Hopefully they will get back to me.2011-01-14 11:07, By: Rick, IP: [126.96.36.199]
L18: IRS GreetingsApparently you have limitless time to waste dealing with the IRS, or your time is not worth anything to you. A tax professional could contact PRACTITIONER PRIORITY SERVICES (PPS) at IRS, and if unsuccessful there, he could contact TAXPAYER ADVOCACY SERVICES ( TAS) who normally resolves issues within 30 days. ( We cannot bypass PPS and go directly to TAS in most situations, but he could try after explaining that you could not find an IRS rep or supervisor who understands SEPP 72-T plans.)2011-01-14 13:52, By: dlzallestaxes, IP: [188.8.131.52]
L19: IRS GreetingsJust thought I’d pass on an update. The IRS has now acknowledged receiving the information that I had faxed to them. They say in their letter that I will have a determination in hand by the 21st of February based on the paperwork Ihad sent. I received the letters from the IRS on the same day as the date on the letter. I wonder how theydo this? Also TRP will not alter the 1099r forms to show a code 2. The person at the IRS also stated that they plan to require more people to file their 72t plans with them because “anyone can claim a code 2” on a 5329 form. Hopefully these are just uninformed Government workers.2011-02-12 17:02, By: Rick, IP: [184.108.40.206]
L20: IRS GreetingsWell the IRS said that I would have a reply by 02/21/2011. Today is the 22nd and I have received nothing. Strange that they would pick a Federal holiday for their response date. I decided to call the number on the last letter that I received from them. After a very short wait I spoke with one of their representatives. According to what he said, my case will be officially closed on 02/28/2011. They have agreed with the paperwork that I had sent in and that I was doing a SEPP 72t. They said I should receive a final letter stating that I will owe nothing and my case is closed within the next two weeks. I would like to thank all involved on this web site for their input and patience. The forms on this siteare what I used to document my plan. I am now only awaiting the final letter and the almost $11,000 nightmare should be over. Thanks again.2011-02-22 22:05, By: Rick, IP: [220.127.116.11]
L21: IRS GreetingsWell, today I received in the mail my confirmation letter from the IRS stating that “We are pleased to tell you we did not make any changes to the tax reported on your return”. So it now appears that with this official letter from the IRS my case has been officially closed and the nightmare that began on 12/31/2010 is now a fading memory. I will owe no additional tax and apparently my documentation was all in order. Once again thanks to all on this wonderful web site.2011-03-02 21:09, By: Rick, IP: [18.104.22.168]
L22: IRS GreetingsRick:Congratulations on your success dealing with the IRS, and thanks for keeping us posted as you progressed through the ordeal. It sounds like you handled this in a professional manner which probably had a lot to do with your success.Jim2011-03-03 16:18, By: Jim, IP: [22.214.171.124]
L23: IRS GreetingsQuite often, when you get a response “we are pleased to tell you that….”, the true meaning of the statement is “we should not have questioned you in the first place, hope you didn’t lose too much sleep over it” :)2011-03-04 19:26, By: Alan S., IP: [126.96.36.199]