New IRS Attitude on “Executory” Errors

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L1: New IRS Attitude on “Executory” ErrorsWhat’s an executory SEPP plan error۝? Generally speaking, once a SEPP plan is designed a taxpayer can plan out, at least on an annual basis, every distribution transaction that should occur for the next five or more years in order to successfully complete the SEPP plan avoiding all penalties and interest. Any time the actual stream of distribution transactions differs from the plan, an executory SEPP plan error has probably occurred; therefore, technically a plan modification۝ has occurred. Through a series of conversations with the IRS, on PLRs that are in the mill۝, we have discovered several items. First, the most common executory errors are:
1.Taxpayer is short or under-distributed for a year.2.Taxpayer is long or over-distributed for a year.3.Taxpayer made a distribution from the wrong IRA; therefore he is both long and short two IRAs respectively.
Secondly, the most common attributes of these errors are:
1.Taxpayer does not discover the error until well after the close of the tax year; typically at tax preparation time.2.Typically, there is some form of contributory negligence by the custodian or trustee.3.None of the parties involved intended۝ for the error to occur.
We have always espoused good documentation and record keeping to avoid getting in these situations; nonetheless, errors do happen. In prior years when one of these errors occurred, a taxpayer had two fundamental choices: stick your head in the sand or pay the penalties under 72(t)(4). Now there is a third choice: what I will call an Error Correction PLR۝.
In order to correct an error, a taxpayer needs to be able to execute one or more of three basictransactions:
1.Ability to re-deposit dollars into the SEPP IRA after 60 days.2.Ability to make a catch-up distribution from a SEPP IRA in a subsequent tax year.3.Ability to move assets between IRAs; one or more of which is a SEPP IRA.
Statutory authority already exists for #1 above in the form of Revenue Procedure 2003-16 pursuant to IRC 408(d)(3)(I). Statutory authority for #2 and #3 does not exist and most likely will not in the future. However, as we all know, the IRS does not always need to rely upon statutory authority to do something. In short, the IRS is now saying, albeit informally, that they will permit / approve all three transactions above through the PLR process whenever the facts & circumstances warrant. In order to be successful, the taxpayer must:
1.Whenever it is 1st appropriate, alert and disclose the error on their tax return computing the penalties and interest due. 2.As soon as reasonably possible, file for an error correction PLR demonstrating:
A.That an error has occurred. Further, that no one involved ever intended for the errant transaction(s) to have occurred.B.Either some one other than the taxpayer is at fault۝ or it is an indeterminate / no fault۝ error.C.That there is a reasonable way to right the ship۝ in terms of correcting the aggregate taxable transactions to the correct amount as well as correct the IRA balances to their correct positions.D.That the taxpayer fully intends to continue the SEPP distribution plan to completion post error correction.
Basically, the IRS is now saying, again informally, that they are willing to listen by evaluating individual taxpayer facts & circumstance and will approve PLR requests that would otherwise impose penalties and interest that would be against equity and good conscience۝. However, no one should interpret this as a new and benevolent IRS. A taxpayer who does not disclose the error and does not file for a PLR, will be penalized @ 10%, plus interest, plus the application of material understatement penalties of 20%.
In my opinion, this starts to look like an amnesty program; e.g. confess now & we will look for a way to forgive; conversely, if we catch you later, look out.
In summary, I would encourage everyone to review their documentation (to insure that it is in good order) and their SEPP transactions to-date to insure that everything is as it should be. Should you discover an error has occurred, do not sit on it and do not rely upon the trustee to fix it. Instead, contact the professional of your choice and act pro-actively to resolve the situation.
TheBadgerwjstecker@wispertel.net
2005-09-30 09:01, By: TheBadger, IP: [66.250.23.21]

L2: New IRS Attitude on “Executory” ErrorsFANTASTIC NARRATIVE. On behalf of tax practitioners, THANK YOU.
As usual, YOU ARE THE GREATEST !!!!!2005-09-30 09:08, By: dlztaxes, IP: [4.175.9.115]