Sole Prop. SEP

[Bird Legs]

A Sole Proprietor, with 1 employee for 2005, has a S E P.
Client makes the required contributions to the SEP, however, the contributions
are made on October 17 instead of prior to then.
What are the consequences? And yes, the deductions for these contributions
were taken on the 1040 and Sched. C. The 1040 was E- filed on Oct. 12.
Any response will be greatly appreciated.
And, yes, I instructed the client that these contributions were to be made no
later than 10/16. Orally, not in writing.

[veritas]

If the IRA administrator reports it to the IRS as a 2005 contribution, nothing. If they report it as a 2006 contribution you are going to get a letter.

A thing that is important to remember is to always have your client tell the person taking the money what year it is to apply to. Always. And then I would not assume it will be handled correctly. One good way is to put it in the memo section on the check along with a letter of instruction.

I will add this is another reason I have a securities license. I handle the paperwork and it gets done the way I intended.

[sea-tax]

I agree with veritas. I would also say that more likely than not you will have to do a 1040x because most companies will classify it as a 2006 contribution if they got it after 10/16/06.
Client could call broker and beg and pleed and maybe they will show it as a 2005 but I would not hold my breath.

[Bird Legs]

Late SEP Contribution

Thank all of you for responding.
Additional info. Client made the SEP contribution on 10/17/06.
Said he told them that it is for 2005. The response was that we record it
as being received on such & such a date. It is up to you to report it
on your tax return for the proper year.

[natiro]

SEP contribution

When I made my own SEP contribution I noticed that the receipt said 2006 contribution. When I told the broker that it should be reported as 2005 contribution, I was told that SEP contributions are reported in the year the contribution is made. Sure enough, the instructions to Form 5498 say that the 2006 Form 5498 should report all contributions made in 2006, even if for the 2005 tax year.

[Bird Legs]

Natiro

thanks for that response. It really doesn,t make sense. In the case of my client
the contribution for the SEP was made a day late. Due on the 16th made on the
17th. Then was told that he could deduct it in either year that he wanted, 2005 or
2006.

[natiro]

SEP - Bird Legs

Was your client told it was up to him to report it in the proper year (which is true), or that he could report it in whichever year he wanted (2005 or 2006) (which isn't true)?

The investment firm where your client made the deposit was correct in that they report the deposit in the year they receive it, no matter what year it is to be designated for.

I disagree with Veritas and sea-tax on this issue. I see no reason why your client would get a letter from the IRS regarding this delinquent contribution. The IRS would have no way of knowing that it was made a day late, assuming the contribution is reported correctly on the 2006 Form 5498. Any contribution made during 2006 is reported on the 2006 Form 5498 no matter which year it should be applied to. As far as I can tell, there is no where on that form that indicates to which year the contribution should be applied.

[veritas]

After looking at the instructions for a SEP contribution I will have to retract the part about the letter. 2005 and 2006 contributions are indistinguishable on the form.

[natiro]

SEP, again

I just wanted to mention that I have a paragraph in my tax return transmittal letter (which is stapled to the client copy of the return) that a retirement plan contribution of "XXX" has been deducted in arriving at taxable income and that the contribution has to be made by such and such date.

I'm able to choose where to place that paragraph and it's the first paragraph in my letter, even before all the filing instructions.

At least I can insure that I put it in writing and if the client got their tax return, then they also got the letter!