72(t) Issue

Submitted by Josh Harmon on Thu, 2023-07-27 18:29

Had a client execute a 72(t) payment schedule with their IRA in 2016. The accountant never explained away the penalty, and the client has paid the penalty every year since 2016. They have stuck to the payment schedule, so the 72(t) schedule is still intact. The CPA said that they could re-file for 2019-2022, but are past the point of re-filing earlier years. Checking to see if there is a solution that the CPA is unaware of.

Thanks!



Submitted by David Mertz on Thu, 2023-07-27 19:34

  • The CPA is essentially correct, but 2019 needs to be included in the years for which a claim of refund cannot now be made unless they timely filed the 2019 tax return less than three years ago under an extension.  Without an extension, the deadline to file a claim for refund on a 2019 tax return was July 17, 2023.  Given that we are only a few days beyond that, perhaps the CPA’s statement was made before July 17 and was able to file the amended 2019 tax return in time.
  • If the client informed the CPA of the 72(t) plan at the outset but the CPA still failed to account for that on the tax returns, the CPA has some responsibility for the errors.  The client probably also bears some responsibility for not effectively reviewing the CPA’s output to catch the errors promptly.  Of course if the CPA was never informed of the 72(t) plan and the relevant Forms 1099-R had code 1, the client would be totally responsible for the error.


Submitted by Janie Williams on Sun, 2023-07-30 17:19

By 72(t) payment, I’m assuming you mean SOSEPP as there are several 72(t) exceptions to the penalty. Have you checked to see which method was used to calculate the amount of the payments to make sure one of the three methods was used, and the payments were correctly calculated.  I can’t just say I want X amount of dollars each year for it to qualify for the penalty exception. The custodian may know something you don’t, which is why it was coded 1 instead of 2. I’ve had a few of these the adviser set up only to tell the TP to tell the tax preparer “72(t)” as if it was some kind of mantra. In checking specifics of the payments, the distributions did NOT qualify as a legitimate 72(t)(2)(A)(iv) exception to the penalty. 



Submitted by Alan - IRA critic on Sun, 2023-07-30 18:12

Most custodians do not wish to get into “underwriting” the accuracy of the 72t calculations or to help manage the plan, some of which can be very complex involving more than one IRA account. Therefore, only a few custodians will issue a 1099R with the Box 7 code as 2 (penalty exception). That forces the taxpayer to claim the exception by attaching Form 5329 and showing exception code “02” as the justification for the penalty exception. If the code is left as code 1 (early distribution), the IRS will expect the penalty to be paid since they won’t know about the 72t plan.



Submitted by Janie Williams on Sun, 2023-07-30 20:07

I understand that, but note the statement says custodian “MAY know something….” Any time you use the SOSEPP exception to the penalty, you need to be sure the calculations are correct, or else it fails, and the penalty is applicable. 



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