Hello,
Client mistakenly thought the Covid Relief for RMDs in 2020 also applied to 72t SEPP payments. What is the best way to correct this? Should client take both 2020 and 2021 SEPP payments and hope for the best? Should the client include a letter or explanation or only if audited?
Thank you
What are your thoughts about thisPrivate Letter Ruling (PLR) 200835033? It appears the IRS ruled that a missed retirement plan distribution under substantially equal periodic payment rules (IRC Sec. 72(t)(2)) can be made up in the following year. Do you think this would help the client’s cause? https://www.irs.gov/pub/irs-wd/0835033.pdf
I don’t think this PLR is applicable to this client unless the client made similar requests to have a distribution made and the parties involved collectively dropped the ball. Nonetheless, there is nothing to lose by appealing the busted SEPP and hoping that the Covid RMD waiver and other Covid fallout will result in some sympathy from the IRS, and that they will both waive the retroactive penalty and interest, but allow the old plan to continue to completion. In general, disregarding Covid matters, the IRS has been trending toward more forgiveness for SEPP infractions. If client has several year in the plan, meaning a larger cost to bust it, and no prior problems, perhaps the IRS will consider that. But no telling how long it will take for the IRS to make a decision given their current backlog.
That brings up another question. Is the old plan still useful to client, meaning that the distribution is enough and not overly excessive, and how many years are left on this plan? If the plan is not very helpful, the client might opt to let the plan end, but appeal the penalty only. A new plan could then be started, however due to rock bottom interest rates, it will likely take a higher balance to generate the same dollar distribution.
Permalink Submitted by Alan - IRA critic on Wed, 2021-08-04 22:16
Technically, the 72t plan was busted at the end of 2020, meaning that the 72t plan no longer exists. QA 10 of IRS Notice 2020-51 clarifies this. 72t distributions are not RMDs, even if the RMD method was elected as the calculation method by client. That said, client may be able to utilize potential “Covid related” sympathy and do as you suggested, taking both distributions this year, and paying taxes, perhaps at a higher rate. I don’t know if client received a larger Recovery Rebate from depressed 2020 income or not or how the IRS will look at that as a negative factor. As for disclosure to IRS, if 2020 has been filed, probably best to explain this to the IRS with the 2021 return showing 2 years of payments. If 2020 is on extension, then it could be explained with the 2020 return and Form 5329 to appeal the retroactive penalty that would otherwise have applied to the 2020 return.