TIRA Contribution made to SEP IRA
Taxpayer intended to deposit $6,000 into a Traditional IRA for 2009. Taxpayer was not covered by any retirement plan for 2009, so a such a contribution would be tax deductible. Taxpayer had an already existing SEP IRA account, and made the intended Traditional IRA deposit into the SEP IRA account. Taxpayer deducted the $6,000 contribution as an IRA deduction on line 32 of his 2009 Form 1040. The IRA Trustee issued a Form 5498 showing a $6,000 SEP IRA contribution for 2009. IRS has sent a notice disallowing the deduction as the taxpayer did not have self-employment income to support a SEP IRA deduction. I have seen other discussion items in this Forum that characterize a SEP IRA as being a Traditional IRA that is allowed to accept SEP contributions. Under that theory, can we argue that the $6,000 contribution to the SEP IRA is, in fact, a $6,000 contribution to a Traditional IRA? Any suggestions and references to support a response to the IRS would be appreciated.
Permalink Submitted by Alan Spross on Thu, 2011-12-01 22:44
Yes, a SEP IRA can accept a TIRA contribution, but it must be correctly recorded as such at the time of contribution, or the 5498 will show the incorrect type.
You could try to argue this error with the IRS, but I doubt if the effort would be successful unless the error was ONLY at the 5498 level. It would probably require a copy of a statement at the time of the contribution showing that the contribution was not a SEP IRA contribution. Note that Form 5498 has a separate block for a SEP contribution vrs an IRA contribution (meaning TIRA). The error was most likely due to mis communication at the time of the contribution, although the unlikely chance of the error occurring only at the 5498 processing level is still worth checking out.
Even if the error had been caught, the contribution cannot be recharacterized from an employer (SEP) contribution to an employee TIRA contribution. It would have to have been withdrawn and re contributed as a TIRA contribution with any earnings on the SEP contribution taxable. The additional problem now is that an excess SEP IRA contribution incurs a 10% penalty per From 5330 unless it can be applied to a later year as a SEP contribution. Did taxpayer have SE earnings in 2010 or 2011? If not, the contribution should be withdrawn before the end of this year to avoid a third 10% excise tax.