Penalty exception
Client received W-2 wages and company disability payments in 2007 in addition to an early distribution from a pension plan.
Client paid the 10% early distribution penaly with his 2007 income tax return
In 2009 client was awarded social security disabilty retroactive to August 2007. I’m contemplating amending his 2007 income income tax return to claim a refund of the penalty under the disability exception.
According to IRS Chief Counsel Advice 200922041 the individual has to establish that he was not able to work in the year of the distribution at an activity comparable to the one in which he would customarily engage.
Question: If his pension distribution was received in 2007 after he became disabled, would he qualify for the exception? Or does the fact that he worked during the same year as the distribution preclude him from taking advantage of the disability exception?
Permalink Submitted by mk foss on Mon, 2010-04-19 22:04
You don’t have to be disabled every day of the year to qualify for the exception. He qualifies for the disabilty exception as of the date that he became disabled under the IRS definition in section 72 of the Internal Revenue Code. Qualifying for Social Security disability doesn’t necessarily mean you meet the IRS definition (court cases have held against the taxpayer) but most people would use that as evidence that the 10% does not apply.
Good luck.