IRS says I owe 10 percent penalty

L1: IRS says I owe 10 percent penaltyI received a Notice CP2000 from the IRS in Fresno, Calif., on Tuesday saying I owe a 10 percent early-withdrawal penalty on my second 72(t) payment in 2009. I have been using the required minimum distribution method and the single life expectancy table.I double-checked my calculations again and can find no mistakes. I filed Form 5329. I have an appointment with my CPA on Wednesday. I have also printed out the Vanguard statement with my year-end 2008 IRA total, the life-expectancy table from Publication 590, and the page from Revenue Ruling 2002-62 that describes approved methods. I expect to send those to the IRS with my explanation. Is there anything else I should include? Any advice would be appreciated. 2011-03-16 04:04, By: Eureka, IP: [207.179.223.140]
L2: IRS says I owe 10 percent penaltyTake a deep breath and relax. You seem to have done everything right.
The IRS does not have a clue how to handle SEPP 72-T plans and distributions. Just give them your documentation, and wait for their “no change” in 3 to 6 months. Do not lose sleep over this.2011-03-16 06:07, By: dlzallestaxes, IP: [96.227.217.194]

L3: IRS says I owe 10 percent penaltyI received a “closing notice” from the IRS today. The key sentence: “We are pleased to tell you that, with your help, we were able to clear up the differences between your records and your payers’ records.” I assume they mean Vanguard’s insistence on marking any withdrawal before age 59.5 as an “early distribution no exception applies.”Thanks to Mr. Stecker and all those on these boards for helping me do it right. 2011-05-13 19:23, By: Eureka, IP: [72.34.10.5]

L4: IRS says I owe 10 percent penaltyI assume that you submitted your calculations to the IRS and they checked out. Used up your time and your CPAs time.
Since the IRS appears to doubt the validity of your (and others)original 5329, you would think by now that the IRS might have considered sending the original inquiry to the custodian, eg ” Taxpayer filed a 5329 indicating they are using a compliant 72t plan to waive the penalty. Please submit your calculations that indicate a different annual distribution than the 1099R submitted”.
That approach might trigger some policy changes among custodians, ie issuing the 1 coding only when there is a specific reason rather than blanket policy.
The IRS is having considerable trouble with custodian 1099R compliance for 72t plans. Wonder how all the extra Obamacare tax reporting is going to fly, ie reporting the “value” of employer healthcare on W-2 forms for starters.2011-05-13 22:33, By: Alan S., IP: [24.119.230.17]

L5: IRS says I owe 10 percent penaltyI wrote my own letter to the IRS and ran it past my CPA, who said it looked fine. He didn’t start his “meter,” so it didn’t cost me anything, except time, anxiety and certified mail service.
I was glad I documented the balances and calculations when I did the distributions, as Stecker and others suggested. Writing the letter to the IRS was mostly just a copy-and-paste procedure. 2011-05-13 23:28, By: Eureka, IP: [72.34.10.5]

L6: IRS says I owe 10 percent penaltyEureka On your 5329 form was line 2 coded with a ’02’?? ’02’= Distributions made as part of a series of substantially equal periodic payments(SEPP)2011-06-21 23:00, By: FrankinWalnutCA, IP: [71.119.58.76]

L7: IRS says I owe 10 percent penaltyYes, it was coded “2” by my CPA. I’m looking at it right now.2011-06-22 00:43, By: Eureka, IP: [207.179.223.187]

L8: IRS says I owe 10 percent penaltyWhile I very much doubt that this is the problem, technically the exception code should be 02, not 2. All the exception codes are two digits.2011-06-22 03:29, By: Alan S., IP: [67.61.144.221]

L9: IRS says I owe 10 percent penaltyThere seems to be an inconsistency on my 2009 Form 1099-R from Vanguard. Box 7 shows code 01, but the instructions for filling out Box 7 on the reverse side of the form list codes 1 through 9 and A through U. No zeros are shown.
The resolution letter from the IRS made reference to “differences between your records and your payers’ records.” Ultimately, the IRS decided my “2” was right and Vanguard’s “01” was wrong.2011-06-22 07:27, By: Eureka, IP: [207.179.223.187]

L10: IRS says I owe 10 percent penaltyYou are confusing the coding on form 1099-R with the coding for the 5329.2011-06-22 18:01, By: dlzallestaxes, IP: [96.227.217.194]

L11: IRS says I owe 10 percent penaltyI looked at the instructions for Form 5329, and codes are, indeed, preceded by a zero. I know the word “why” is seldom fruitful in tax law, but why would the numbers be different? My CPA filed electronically, and he almost certainly used tax-preparation software. I wonder if some software prints a “2” and some prints a “02.”
I will bring this to his attention next year, but I doubt that was the reason for the audit. 2011-06-22 19:58, By: Eureka, IP: [207.179.223.28]

L12: IRS says I owe 10 percent penaltyThere are 26 codes for the 1099-R, and only 12 for form 5329.
If you read closely, you will see that the descriptions of only 3/03 (Disability)and 4/04 (Death) are the same. All of the rest, including 1/01 and 2/02, are different.2011-06-23 00:32, By: dlzallestaxes, IP: [96.227.217.194]

L13: IRS says I owe 10 percent penaltyYes, I see what you mean. Regarding Form 5329, I checked my 2008 and 2010 forms, and they also use “2”. In the course of ordinary life using a base-10 number system, people consider “02” and 2 to be the same thing. I realized we are talking about the IRS here.
I will bring this up next tax season with my CPA. I have two more distributions to go. I hope he isn’t offended.
The IRS did not mention Form 5329 in any of its three letters.
As I said, Vanguard used “01” on my 1099-R, while the instructions on the back say to use “1”. Does that mean they messed up in the opposite direction that I did on Form 5329? I’ll be glad to have the SEPP behind me. 2011-06-23 04:05, By: Eureka, IP: [207.179.223.28]

L14: IRS says I owe 10 percent penaltyIt is surprising that VG used 01. We know that VG will not underwrite the accuracy of your plan and reflect it with the 2 code. But the reason for the IRS inquiry may well reflect only theirmissing or not understanding the reason for the 5329 or some totally unrelated reason.
These situations typically work out OK after the IRS puts you through the basics of explaining what you did and why. So in the meantime try not to lose any sleep over this.
That said,when your plan ends, it does not mean that you won’t hear from the IRA over it again. The IRS often lags for 2 or more years, so you really are not free of inquiries until about 3 years after the plan ends.

2011-06-23 04:37, By: Alan S., IP: [67.61.144.221]