Reporting a Busted Plan?
L1: Reporting a Busted Plan?What are the reporting requirements (if any) for busting a plan?
The tax due would be the 10% penalty on just the amounts withdrawn by the SEPP and then the interest penalty only on that portion (the 10% portion, i.e., the withdrawls), is that correct?
2012-09-26 01:13, By: howbustedisdone, IP: [188.8.131.52]
L2: Reporting a Busted Plan?That is basically correct. We don’t know exactly how the IRS calculates the interest penalty, so it is best to let the IRS bill that. They probably use the quarterly interest rates for underpayment but there are several different ways that they might apply those rates.
You would report your busted plan on line 4 of Form 5329 for the year the plan was busted. Nothing goes on lines 1 or 3. Enter the total amount subject to penalty (known as a “recapture tax”)on the form and then attach an explanatory statement itemizing the amount for each calendar year now subject to the penalty.
For open tax years (2009-2011), you may qualify for a different penalty exception other than the SEPP payments, and you could incorporate that in your explanation to partially offset your penalty owed. For 2012, you would just include the proper exception code with a separate 5329 from the one used to report the busted plan.
Once busted, you may or may not wish to start up a new plan. You would treat the new plan in all respects just as if you never had a prior plan. It’s easier to report if you start the new plan the next January, but you don’t have to wait. If you start a new plan right away, it is going to take a more detailed explanation to the IRS for them to understand what you are doing.
2012-09-26 02:06, By: Alan S, IP: [184.108.40.206]