Pushing The Envelope

L1: Pushing The EnvelopSome of our recent messages and responses have been focused directly or tangentially on some grey areas of SEPPs and the proper application of IRC 72(t)(2)(A)(iv); often phrased as: “Why can’t I do XXXXXXX?”.Most of the time the answer is pretty clear however, given a modest amount of time and a little ingenuity, a taxpayer is always capable of coming up with a fact set that just doesn’t fit correctly & therefore causes grey & ambigious answers to surface.In many areas of the IRC it is actually prudent to push the envelop when in some grey areas; e.g. take the aggressive position on the XYZ deduction in 2001; the worst that can happen is you get examined in 2003-4; the deduction is disallowed and you owe some back taxes plus interest. At that point in time you can always choose to fight or surrender.SEPPS are different in that they are long-lived and they are not retroactively correctable. Assume you are 48 and started a SEPP in 2002 & you will be continuing that SEPP until 2014. Further, your SSN comes up in the great audit lottery in 2010 for your 2008 tax return, effectively after 7 years of your SEPP. For whatever reason, let’s further assume that your SEPP program is disallowed because you pushed the envelop & the IRS disagrees. Your penalty (including interest) will approximate (it depends on how penalty interest rates move around) 100% to 120% of your annual SEPP amount. So let’s say you have been taking $50k a year since 2002. Are you prepared to write a check to the IRS for $60k in 2008 becuase you pushed too hard?Further, in many examinations the taxpayer is afforded the opportunity to say something like: “Well, let’s recharacterize the transaction & treat it in the ABC manner thus leaving a residual disallowed amount and a materially smaller tax due”. NOT HERE. Either a SEPP program is in compliance or it isn’t; it is “on” or “off” for the full amount. There is no way to characterize part of a SEPP as okay and part not okay. Lastly, ther is no statutory ability (and therefore there is no way for the IRS to grant any relief) to go back in time and correct the errant transactions.Bottom Line — DO NOT PUSH THE ENVELOP ON SEPPS. The dowside risks are simply too great.If you feel you must push, then get your SEPP program insured & there are two ways to do it. One, find a CPA expert on SEPPs who will issue you his/her opinion that your SEPP program is qualified thus you are now essentially riding on the CPAs professional liability insurance. Two, file for your own private letter ruling & do it before you start, not after you start.TheBadgerwjstecker@wispertel.net2002-04-20 09:51, By: TheBadger, IP: [127.0.0.1]
L2: Pushing The EnvelopBadger– This is truly excellent advice. Congruently, as part of a previous reply to Sonny you mention that to paraphrase: “8 out of the 12 PLRs were favorable”…to wit…”By: TheBadger Date: 4/20/2002 Subject: RE: Sonny’s comment…. Third, since the beginning of time on the whole issue of SEPPs there have been 12 PLRs issued on “annual recalculation” of which 8 have been favorable. Looking at the 8, 7 of the 8 have all had valuation dates of 12/31/XX. Only one, #2000-20063, had a valuation date other than 12/31/xx & this one had a valuation date of 4/30/xx. In this one PLR the taxpayer is measuring on 4/30/xx using annual recalculation and immediately after recalculation taking the full annual amount as a withdrawal. TheBadger”My question pertaining to the foregoing is if 8 of 12 were “favorable” then do you happen to know why the remaining 4 were rejected?I assume there must’ve been some major anomalies in those individual cases that would’ve kicked out the previously approved recalculation method for the other 8 cases.Also, since accuracy is so important in determining SEPP payouts, isn’t it a valid concern that the IRA administrator for instance could botch up the calculations effective 1/1/XX and therefore all subsequent years thereafter would be “penalized” even though the error was corrected sometime later? How then does one ensure that on 12/31/XX that the recalculations effecting payout on 1/1/XX are 100% correct? How “accurate” does accurate need to be in the eyes of the IRS?What you and gfw provide here is absolutely outstanding and greatly appreciated by all I’m sure.Thanks again.endgame 2002-04-20 11:16, By: endgame, IP: [127.0.0.1]

L2: Pushing The EnvelopMy question pertaining to the foregoing is if 8 of 12 were “favorable” then do you happen to know why the remaining 4 were rejected? I assume there must’ve been some major anomalies in those individual cases that would’ve kicked out the previously approved recalculation method for the other 8 cases.The four “recalculation” PLRs that where unfavorable all had a common flaw. Each of the 4 had some retroactive feature in them; e.g. the taxpayer had already done 3-4 years of a SEPP using a fixed methodology & now the taxpayer wanted to retrace their steps to the very beginning and overlay a recalculation methodology on top of or replacing the old methodology making corrective distributions for the prior years and usign the recalculation methodology going forward. Conversely, the 8 that were approved were all prospective or forward looking only.Also, since accuracy is so important in determining SEPP payouts, isn’t it a valid concern that the IRA administrator for instance could botch up the calculations effective 1/1/XX and therefore all subsequent years thereafter would be “penalized” even though the error was corrected sometime later?Rarely is an IRA administrator willing to take on the duty/liability of performing and by implication certifying the accuracy of annual SEPP computations; this is almost always the provence of the taxpayer only.How then does one ensure that on 12/31/XX that the recalculations effecting payout on 1/1/XX are 100% correct? How “accurate” does accurate need to be in the eyes of the IRS?You have heard the old saying about “measure twice, cut once”. Well, here I think the operative word is “thrice”. As a general rule, the IRS considers accurate to mean 100% accurate but for “di minimus” issues defined as less than one dollar. No one I know of has had their SEPP plan rejected for being off $42.88; but why take that kind of chance.What you and gfw provide here is absolutely outstanding and greatly appreciated by all I’m sure.Let’s be perfectly clear here. This is Gfw’s website, not mine. I just hang around to put my 2 cents in periodically.TheBadgerwjstecker@wispertel.net2002-04-21 08:05, By: TheBadger, IP: [127.0.0.1]