SEPP account balance
L1: SEPP account balanceTaxpayer, age 51, has a rollover IRA account with $500,000 balance. Taxpayer owes IRS $300,000. We are requesting the IRS to levy the IRA to satisfy the liability which will avoid the penalty. Question is whether we can setup SEPP using the balance prior to the levy. Would this violate the “reasonable manner” of Rev Rul2002-62, 2.02(d)? In addition would the levy be a disqualifying modification? The objective is to have the SEPP payments pay the tax on the $300,000 withdrawl. If have to recalculate using $200,000 balance taxpayer won”t have enough cash to pay tax in April 2009. Any thoughts would be appreciated.P Heath2008-07-11 08:27, By: SWTGRAD74, IP: [126.96.36.199]
L2: SEPP account balanceHello:
Of one thing I am sure; this question has never been formally discussed much less ruled upon in any publication from the IRS. That said, we are therefore in never-never land and there are two competing positions:
1. Any distribution of funds from a SEPP IRA which is other than the SEPP distribution constitutes a modification under IRC 72(t)(4); therefore the 10% surtax on the lifetime-to-date SEPP distributions applies.
2. A levy by the IRS looks suspiciously similar to a judge”s order ina divorce decree bifurcating the IRA between ex-spouses. In this case the IRS just recently opined in a PLR that this bifurcation of the IRA did not constitute a modification of a running SEPP plan and therefore the taxpayer was permitted to “step-in-stride” reducehis SEPP distribution going forward without penalty.
Now, how to resolve your question. The only mechanism of which I am aware is to file for a private letter ruling; cost of $9,000 to the IRS plus professional fees to prepare the ruling.
TheBadgerwjstecker@wispertel.net2008-07-11 13:55, By: TheBadger, IP: [188.8.131.52]
L2: SEPP account balanceThanks for your thoughts. I think I”m in never never land most of the time these days.P Heath2008-07-11 14:03, By: SWTGRAD74, IP: [184.108.40.206]
L2: SEPP account balanceEven with a favorable ruling for an unmodified SEPP, I don”t see the sense in starting an 8 year obligation to pay a one time tax bill that is due in the first year. The marginal rate for the distribution will be inflated with a 300,000 taxable distribution and the tax duedatewill directly follow the distribution. There would be an advantage of trying to negotiate an installment on the lien and that would level the tax rate as well as the tax payment schedule. If not on the distribution, then on the tax bill only. I have no idea if the IRS would be amenable to this, particularly over a multi year period.2008-07-11 14:21, By: Alan S., IP: [220.127.116.11]