SEPP update question
Ed’s October IRA update, PLR 200835033: IRS Says ‘Make-Up” Distribution does not Modify SEPP:
I don’t really understand why there were two IRA distribution forms involved? Wouldn’t one distribution form set up the SEPP? What am I missing?
Thanks for your time,
KH
Permalink Submitted by Alan Spross on Sat, 2008-10-04 04:00
KH,
I just read the PLR. In this case the taxpayer was using two IRA accounts for a 72t plan or possibly two IRA accounts for two separate 72t plans, but the number of plans is immaterial.
Taxpayer was using several intermediaries to notify the IRA custodians of the two IRAs, and had correctly completed two separate distribution forms, one for each IRA account. One of the distributions never got done, despite the taxpayer’s follow up efforts. Finally, the distribution was done, but in January of the following year.
Basically, the IRS found that the taxpayer had used due diligence in completing the distribution forms and the error was totally due to administrative failure by one of the companies relaying the forms to the IRA custodian.
The IRS agreed that there was no modification to the 72t plan by the insufficient first year distribution and the corresponding additional makeup distribution of the following year.
The lesson in this is that the more intermediaries handling the paper, the greater the chance of a foul up, and the more complexity a 72t plan has, the greater the chance for administrative error.
A taxpayer can have a 72t plan without the IRA custodian even knowing it, but it is generally considered to be a benefit if the IRA custodian knows the plan exists. They may or may not code the 1099R with the exception code, but this coding provides some added insurance against an IRS inquiry.