The IRS disallowed the tax deduction of a client’s Traditional IRA on their 2021 individual tax return because they said they were active participants in a SEP-IRA for that year. The client also deducted a SEP-IRA contribution on their 2021 individual tax return, however, the contribution was made in October 2022 before the extended due date of the 2021 tax return. There were no SEP-IRA contributions made in calendar year 2021.

According to IRS Notice 87-16, “if discretionary plan contributions are not allocated to an individual’s account by the last day of the plan year, then the individual is not covered by the plan for the tax year in which the plan ends”.

Since the last day of the plan year for the client’s SEP-IRA is December 31, and there were no SEP-IRA contributions in calendar year 2021, would they be considered an active participant for tax year 2021 or 2022? If the answer is 2022, would they be allowed to deduct both their SEP-IRA contribution and Traditional IRA contribution on the 2021 tax return? Or does deducting the SEP-IRA contribution on their 2021 tax return automatically make them active participants for 2021, even though the contribution was made in 2022?