72t reporting HELP!
Hello,
My client has been taking 72t payments monthly in the amount of $1400 from a variable annuity. The annuity is linked with First Clearing Corporation as custodian so the liquidations come from the annuity and then are deposited into the linked IRA custodian account. The problem we have is that the annuity company sent the liquidation on Dec 26, 2008 and First Clearing did not receive it until Jan 5, 2009, this was then distributed to the client. The 1099R sent from First Clearing only shows 11payments taking place in 2008 and they will not back date the 12th payment to show it actually being distributed in December 2008, because they actually did not send it out until Jan 09 even though the annuity company sent it December 26, 2008.
The question I am asking is the 1099R my client has shows $1400 short for 2008. We did not make any changes to the payments, but there is an issue with the delay when the payment was received. How can the client’s CPA handle this and will this cause a penalty even thought the client will have 12 payments in a calendar year? Please help. Thank you
I also now know to have the annuity company as the custodian not First Clearing to avoid any future problems!
Lewis
Permalink Submitted by Alan Spross on Tue, 2009-03-31 22:40
I would assume that this 72t plan actually consists of an IRA annuity account and a separate IRA account, under which the balances in both accounts composed the opening balance for the 72t plan. If that is not the case, this plan was never valid to begin with.
Getting to your main question, there have been several recent favorable IRS “error correction” letter rulings under which the penalty was waived if the error was caused by the custodians. Some of these rulings are 2005 03036, 2006 16046, 2008 40054, and 2008 35033. The downside is that requesting a letter ruling is expensive, around $10,000 plus. I would make sure that this is a valid 72t plan to begin with before investing more money into it. Finally, any of these plans that are distributed on a monthly basis should be set up for the distribution to be done early in the month. That way, the December distribution can be secured if it does not come out early in the month.
The client will also have to withdraw the make up distribution in 2009, so will be taxed on 13 distributions in 2009, vrs. 11 in 2008.
Permalink Submitted by [email protected] on Tue, 2009-03-31 23:56
Alan,
The plan is valid. The only thing that is in the brokerage IRA is the linked annuity, it is linked so that I may view the balance with the rest of the accounts. I seperated the rest of her IRA investments
If I understand correctly you are saying the client should report the 11 payments on her taxes this year and in 2009 take 13 payments and show that on her taxes for 2009?
Permalink Submitted by Alan Spross on Wed, 2009-04-01 00:22
Yes, the tax reporting would conform to the 1099R reports, where you have 11 monthly payments issued in 2008. One of the requirements is that the taxpayer correct the shortfall ASAP, which means taking 13 payments for 2009. The tax reporting would follow these actual distributions.
It might be worth a try to claim the exception on Form 5329, and submit a personal request documented as thoroughly as possible to excuse the distribution error. Part of that request would include the statement showing the makeup distribution early in 2009. If this fails, then the more expensive PLR request could be considered as Plan B. In addition to these past favorable rulings on error correction, the IRS might be more understanding of the problems presented by losses in retirement accounts.
Permalink Submitted by [email protected] on Wed, 2009-04-01 00:34
Alan,
Where can I find those letter rulings? Thank you
Permalink Submitted by Alan Spross on Wed, 2009-04-01 00:56
Here is link:
http://www.irs.gov/app/picklist/list/writtenDeterminations.html