IRS penalties

L1: IRS penaltiesDoes anyone know of any actual cases where someone accidentally broke their 72t and were caught by the IRS? What were the actual penalty percentages? Do they ever give someone a break and let them fix it if possible? Do they ever waive the penalties and interest? If someone was taking 72t withdrawals for 7 years and then switched to the MD method and calculated wrong andwithdrew $100 too much would the IRS actually charge $100,000if that was what the interest and penalties would come to?
Mike2005-12-18 07:16, By: daddy0, IP: [69.120.56.189]

L2: IRS penaltiesHello MIke:
When all the dust settles, the IRS must impose IRC 72(t)(1)&(4) — essentially the code sections that impose the 10% surtax plus interest; e.g. the IRC can not “give some one a break”. Therefore, determining that a SEPP plan is busted can itself be difficult to determine; however, financial records have a tendency to speak for themselves.
Therefore, when the determiniation is made that a SEPP plan was/is busted, the IRS always imposes the 10% surtax plus interest without exception. These penlaties & interest are never waived and the amounts are not negotiable or subject to compromise.
If the taxpayer discloses on their return that their SEPP plan is busted then it is a straight math exercise of computing the penalties and interest. The interest rates have recently ranged from a high of 8% to as low as 4% depending the periods of time involved.
If the taxpayer does not disclose that their SEPP plan is busted and the issue is uncovered during an audit, then all of the above applies plus “substantial underpayment penalties” and “fraudulent return penalties” which can add an additional 20% to 50% on top.
All of these amounts are tallied up in a deficiency notice from the IRS. If, after 90 days,the taxpayer can not or refuses to pay these amounts the IRS commences “levy &attachment” proceedings; e.g. they come at you are start taking your other assets. In short, the IRS doesnot offer any lienency in this process because the law does not permit it.
The above is why SEPP plans can be considered dangerous. They are executory for years; as few as 5 and as long as 15 or so. Inadvertent errors can occur & it is the taxpayer’s responsibility to be continually checking to make sure that everything is done exactly as it should be. Unfortunately, when an error does occur, the financial advisors, brokers, custodians and trustees all have a tendency to run for cover leaving the taxpayer more or less standing naked in front of the IRS.
TheBadger
wjstecker@wispertel.net
2005-12-18 08:45, By: TheBadger, IP: [66.250.23.21]

L2: IRS penaltiesOk, the IRS has no leeway when it comes to penalties and interest. But going back to my example of making a small error do you think the IRS would declare the 72t busted? Do you know if this has happened to anybody?
By the way I think my 72t is okbut if I had to do it over I would have withdrawn as little as possible each year and paid the 10% penalty. What I’m having trouble with is all the interest they could charge. Itappears that you could take 10 years worth of withdrawals and then get audited 2 years after that and have to pay 12 years of interest and then maybe penalties. That’s crazy!
I do have one other question. I switched to the minimum distribution method this year. I took one annual distribution in Nov, 2005. I used the 12/31/04 account balance. Is that ok?
One more thing. Everyone should explain the 72t process to your spouse in case they are audited after you die.2005-12-18 10:17, By: daddy0, IP: [69.120.56.189]

L2: IRS penaltiesOk, the IRS has no leeway when it comes to penalties and interest. But going back to my example of making a small error do you think the IRS would declare the 72t busted? Do you know if this has happened to anybody?
YES. The IRC definition of “di minimus” is $1.00. Any amount above that is material. I have seen SEPP plans busted for less than $100.00.
By the way I think my 72t is ok but if I had to do it over I would have withdrawn as little as possible each year and paid the 10% penalty.
WHY. As long as you stick to the plan you are fime; no penalties and no interest.
What I’m having trouble with is all the interest they could charge. It appears that you could take 10 years worth of withdrawals and then get audited 2 years after that and have to pay 12 years of interest and then maybe penalties. That’s crazy!
YES if you (in)advertently busted the plan before conclusion. If you bust the plan and you took a distribution in 1994; you now legally owe an extra 10% on that 1994 distribution & that 10% was due 4/15/1995. Therefore, in addition to the penalty you also legally owe 10 years of interest because you are now more or less 10 years late in paying the penalty. This is not crazy; in fact it is very logical & correct. Most impotantly, it is the law.
I do have one other question. I switched to the minimum distribution method this year. I took one annual distribution in Nov, 2005. I used the 12/31/04 account balance. Is that ok?
YES.
One more thing. Everyone should explain the 72t process to your spouse in case they are audited after you die.
That’s what good documentation causes.
TheBadger
wjstecker@wispertel.net
2005-12-18 10:36, By: TheBadger, IP: [66.250.23.21]

L2: IRS penaltiesBadger:
Thanks for the information. Maybe it’s the law but it seemscrazy to have to pay maybe $50,000 for a $100 mistake. There are good laws and bad laws and with the IRS code so complicated some consideration should be given.
I have 2 things that worry me about my 72t
1 – When I started it in 1999 using the annuity method I used an interest rate a little above 120% of the fed rate. Now it’s an explicit rule but back then I didn’t think it was. I used what I thought was a reasonable interest rate – 8% – which is what they used in Pub 590 and it was less than the prime rate at the time. I’ve also made more than 8% a year since I started.
2 – I wrote about this before. I received a class action settlement check (from a stock I owned in the IRA) made out to my IRA and I deposited it in my IRA. This could possible look like I added money to the account.
What bothers me is that I could be audited by a gung-ho or crazy or stupid auditor and he says my 72t is borken. Since a reasonable rate is open to interpretation my fate is in the hands of an auditor.
Thank you for all your help now and in the past.
Mike2005-12-18 11:10, By: daddy0, IP: [69.120.56.189]