Scary IRS Letter
L1: Scary IRS LetterI have been taking 72T/Q distributions for 6 years from 2 VA contracts and one Traditional IRA. I have transfered these accounts to different insurance companies and IRA custodians since they were started.
I get 1099R’s coded with a 1 and file 5329 claiming a code 2.
I have never been questioned but today I recieved a notice of taxes due with penalty for the distributions for 2007 only. Over $10,000.
It may not be easy to get backup fom my original insurance company and IRA custodianm since those accounts are closed. I started these before 1/1/2003 under 89-25 rules at the timeI could pick my own expected interest rate.
My question is, should I just call the IRS and try to explain or should I hire a professional? They asked forbackup from my custodians saying I am under 72T/Q. My current custodians do not know I am under 72T/Q because the plans were not started with them.I do not have a lot of information from the time these were started other that my letter to them asking them to start the withdrawals.
I assume I am being questionedby someone “ill-informed” onhow 72T/Q’s work at the IRS. Is that a naive assumption?If they were questioning my 72T/Q plan setup they would be asking for back taxes for 6 years. In my case that would be more than $100,000 in penalties.
2009-03-28 17:40, By: Wayne, IP: [188.8.131.52]
L2: Scary IRS Letter>>before 1/1/2003 under 89-25 rules at the timeI could pick my own expected interest rate.Curiosity question… what interest rate did you use and what was the month and year of the 1st distribution?2009-03-28 18:01, By: Gfw, IP: [184.108.40.206]
L3: Scary IRS LetterFor the annuity contracts I used 9%. They are still well above water and doing fine. I started them 7/31/2000 and used 6 months the first year. Longer than 6 years ago I see.
For the IRA i used 6.75%. That was in 12/31/02.I started with 1 months distribution the first year. That one is depleting slightly.2009-03-28 18:14, By: Wayne, IP: [220.127.116.11]
L4: Scary IRS LetterBased on the interest rates that you used the apparent lack of documentation, you may need help.
Even under 89-25 you couldn’t just pick any interest rate – the generally accepted maximum rate was the 120% long term date in th month that the 1st distribution was made. In December 2002, that rate was 5.91%. In July 2000, the 120% rate was 7.70% – you appear to be high on both dates.2009-03-28 18:33, By: Gfw, IP: [18.104.22.168]
L5: Scary IRS LetterBack in 2000 and 2002 I really do not believe there was any requirement or practice to use 120% of the long term rate.My insurance company didn’t have a problem with 9%, they calculated my withdrawal based on me supplying the rate to use. I think it was termed that it needed to be a “reasonable” rate at the time. I know many people were using 10% or more at the time.
I realize it is muchhigher than what would be allowed under the new rulesand many people got in trouble with the high rates.2009-03-28 18:44, By: Wayne, IP: [22.214.171.124]
L6: Scary IRS LetterI just re-read 89-25. They used 8% in their own example of the calculation. I don’t think 9% or 6.75 % was out of line at the time. You may disagree. I do not see this as a problem. Do you really think the IRS might think it is?2009-03-28 18:51, By: Wayne, IP: [126.96.36.199]
L6: Scary IRS LetterTherewas always a requirement that the rate be reasonable and the generally accepted reasonable rate was the 120% long term rate.There were a lot of insurance companies that accepted anything – it doesn’t mean that they were right. That’s one of the big reasons thatR.R. 2002-62 defined an exact rate.
I’m merely suggesting that you be prepared- the interest rate could be one of the first items that is looked at. From89-25… “and using an interest rate that does not exceed a reasonable interest rate on the date payments commence.” I do believe that when 89-25 was released, 8% was very close to the 120% long-term rate.
I would definitely look for the originaldocumentation and calculations -especially if you have something in writing from the insurance company or the IRA trustee/custodian.2009-03-28 18:56, By: Gfw, IP: [188.8.131.52]
L7: Scary IRS LetterI already looked and I don’t have much in documentation on the annuities. I have a letter asking them to calculate my estimated withdrawals based on 9%. They responded on how much that would be. I think I must have filled out an official form requesting them to do it. I do not have a copy in my file. The calculations were done by the insurance company and the payments were started. Do you think the insurance ccompany would still have it on file even though that account has been closed for 5 years or so?
On the IRA I have a letter I wrote to Schwab asking them to start the withdrawals based on 6.75%.
I do have 1099R for all the years showing the same withdrawal amounts since I started.
That’s about it.
Slightly more worried now.
As I responded to the Badger, I did attach a spreadsheet with my 72T/Q withdrawals for all the years to my tax returns. Do you think I should just point them to that for now and see where that goes?
2009-03-28 19:10, By: Wayne, IP: [184.108.40.206]
L2: Scary IRS LetterHello Slightly:
Everyone here already knows my opinion on these issues; but, I will repeat for your benefit:
1. ALL letters from the IRS are scary; just some are more scary than others; therefore we always preach that one shouldalready have the letter written which is the reply to the scary letter before commencing SEPP distributions.
2. Never, ever communicate orally with the IRS; it’s kinda like communicating orally with a snake. Always communicate in writing.
3. Whether to hire a professional is borderline. Given the likely dollars involved and the absence of the “perfect” documentation. I would lean towards yes.
2009-03-28 18:21, By: TheBadger, IP: [220.127.116.11]
L3: Scary IRS LetterWhat I didn’t mention is that attached to my 2007 return (as well as all returns since I started the 72t/q) was a spreadsheet showing all the pertenent facts regarding my 72T/Q withdrawals. I have withdrawn the same amount… year after year… without exception.
Do you think it is appropriate to just point them toward that attachment and see what the response is?
2009-03-28 18:31, By: Wayne, IP: [18.104.22.168]
L4: Scary IRS LetterI realize Iasked for specific advice and that is not fair. I am going to reply to the IRS in writing using general information and see where that goes. If the IRS is digging deep into my situation I will hire a professional for help.
Thanks for you help.
I’ll update this post as it develops…….2009-03-29 15:40, By: Wayne, IP: [22.214.171.124]
L5: Scary IRS LetterWayne:
Since you apparently do have some documentation with your spreadsheets and maybe something else, and since you are talking about $100,000 in penalties and interest, and since you started under 89-25,my suggestion is to hire Bill Stecker …. TheBadger … to possibly apply for a PLR or atleast write the letter to the IRS. This is what Bill does and he will be happy to work with you.
Jim2009-03-30 16:11, By: Jim, IP: [126.96.36.199]
L6: Scary IRS LetterThanks for that advice. I decided that I am going to try my own very simple letter to the IRS first. That should show whether theyare looking seriously at my situation or just doing a kneejerk reaction because I havea 1 in box 7 of my 1099R’s.If that doesn’t solve it “The Badger” is my man.
I really don’t think I have done anything wrong, my starting interest rates might have been high. However, 89-25 used 8% in their example, I don’t see how they could say my rate of 9% or 6.75% was “Unreasonable”, that seems subjective. There were no guidelines for the rate at the time, I do not believe, even though gfw might have been using 120%of the long term rate.Of course I could find out I am wrong.I do have a lot of money on the line here, that is for sure. I have studied the 72t/q pretty closely over the years and have read this website for a lot of years, maybe since it started. I thought I was in pretty good shape. My biggest problem may be that I changed insurance companies and IRA custodians several times (doing 100% complete exchanges) which leaves some of the past documentation in doubt.
I will keep posting as this develops……
2009-03-30 16:42, By: Wayne, IP: [188.8.131.52]