Q. Does 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 and withdrew $100 too much would the IRS actually charge $100,000 if that was what the interest and penalties would come to?
A. 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 someone 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 determination is made that a SEPP plan was/is busted, the IRS always imposes the 10% surtax plus interest without exception. These penalties & 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 can take your other assets. In short, the IRS does not offer any leniency in this process because the law does not permit it.
The above is why SEPP plans can be considered dangerous. They are executed for years; as few as 5 and as long as 15 or so. Inadvertent errors can occur and 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 advisers, 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.
Posted to the Discussion area on 12/16/2005 by The Badger in response to a Question from Mike.