H E L P

[Bird Legs]

Client, during the year 2004, put $2400. into a SEP/IRA. In April of 2005, told her
she was not self employed, therefore not eligible for a SEP/IRA. She then had this
$2400. transferred to a regular IRA, on April 12, 2005, and we claimed this as a regular IRA Contribution.
In looking through paper work for the 2005 return, there is a 1099-R for 2005 showing the
following: Box 1-Gross Distr. $2400. Box 2a-Taxable Amount $2400.
Line 7-a Distri. Code P-Excess Contributions plus earnings/excess deferrals taxable in
2004.
When I called the broker handling this transaction and asked about this, the response
was "the paper work was started on this transfer on April 12, 2005 and was completed
on April 22, 2005."
Does this mean that this $2400. will be taxable in 2004, because the paper work was not
completed by April 15, 2005?
There is also a 2nd 1099-R, for 2005, in the amount of $95. reflecting the earnings of
the $2,400. with a code 8: Excess contributions plus earnings/excess deferrals (and
or earnings) taxable in 2005.
Am assuming this $95 will be taxable as a distribution.
Like I said in the title:
H E L P.

[JON]

Sep/ira

can accept IRA or Sep payments. That is why it is called an IRA/SEP employer or employee contributions can be made. You could have changed the designation of the type of contribution, but not chage in the account should have been necessary. The employee sets up the IRA account and designates it as available for SEP contributions, but can always but IRA contributions of their own in it-deductable or not. Good luck now..

[Armando Beaujolais]

Client, during the year 2004, put $2400. into a SEP/IRA. In April of 2005, told her
she was not self employed, therefore not eligible for a SEP/IRA. She then had this
$2400. transferred to a regular IRA, on April 12, 2005, and we claimed this as a regular IRA Contribution.
In looking through paper work for the 2005 return, there is a 1099-R for 2005 showing the
following: Box 1-Gross Distr. $2400. Box 2a-Taxable Amount $2400.
Line 7-a Distri. Code P-Excess Contributions plus earnings/excess deferrals taxable in
2004.
When I called the broker handling this transaction and asked about this, the response
was "the paper work was started on this transfer on April 12, 2005 and was completed
on April 22, 2005."
Does this mean that this $2400. will be taxable in 2004, because the paper work was not
completed by April 15, 2005?
There is also a 2nd 1099-R, for 2005, in the amount of $95. reflecting the earnings of
the $2,400. with a code 8: Excess contributions plus earnings/excess deferrals (and
or earnings) taxable in 2005.
Am assuming this $95 will be taxable as a distribution.
Like I said in the title:
H E L P.

Withdrawing an excess contribution by the April 15th deadline also avoids the 6% penalty on excess contributions. The instructions for Form 5329 state "For purposes of Form 5329, a traditional IRA is any IRA, including a simplified employee pension (SEP) IRA, other than a SIMPLE IRA or Roth IRA."

The instructions for 5329 allow the taxpayer to withdraw the excess contribution by the due date including extensions, and also allows six months after a timely filed return excluding extensions.

This is a brain teaser. How do you make sure your client isn't taxed twice?

A distribution of excess contributions is made in the context of a deduction having been previously taken for that contribution. In your case, if I understand the facts correctly, you did not take a deduction for the SEP contribution for 2004 (you took the deduction for a traditional IRA instead), yet the distribution is showing as taxable.

Possibility Number One: Attach a statement to the 2005 return explaining things. The IRS will then ignore that statement and send a bill.

Possibility Number Two (just a thought - don't quote me): Amend the 2004 tax return putting the SEP contribution back in there, and also report the $2,400 amount as taxable income as reported on the 1099-R. It will be a wash.

The regular IRA contribution depends on what year it was made for. From your post, it seems that the brokerage made the contribution for 2005? If that's the case, on your 2004 amended, remove the regular IRA deduction. Then include the deduction on the 2005 return.

I'm getting a headache, but I think this way of reporting will end up reflecting one net deduction and one contribution. I think it would also be better than merely attaching a statement, since this will offer the IRS a roadmap via forms filed, and it will put the ball in their court.

The earnings are taxable. Have the client withdraw the earnings and pay tax on that amount.

[Bird Legs]

Armando

you are correct in that a deduction was taken on the 2004 return for the $2400. contribution. It was deducted as an IRA contribution. Now client has this 2005 1099-R
Reporting excess contributions and taxable contributions of $2400. to be taxed on the 2004 return.
Are you saying to amend the 2004 return and adding the 2400. excess contribution to income and then deducting it again, making a total deduction of $4800.?
I will take the 2005 contribution, of $2000., as an IRA deduction on the current year return.

[Bird Legs]

Jon

Additional info. Client is a nurse and was working relief work all over the country. One year had to file 8 different state income tax returns for her. I did not believe that she
could just open up & contribute to a SEP/IRA on her own. She could not participate
in any of the plans where she worked.
She received a W-2 from the various employees.
Thanks Jon, for your response. You did raise a question that I may need to
find more information on.