Early Distribution from IRA. Not sure about penalty

[Dave T]

T/P is 59 years old,. He received his termination notice in December 2019 but was technically still on the books until March 2020.

He rolls his retirement accounts without tax ( Code G on 1099R).

During the year he takes 4  distributions from an IRA totaling $50K ( taxable ) and at year end gets a 1099R  with Code  1, early withdrawal no exception  and thus $5K penalty.

I call client to tell them of this and they say financial advisor had told them there would be no penalty due job loss.  I don't see this as Covid related and they don't meet another Covid requirement so I think the penalty stands unless I am missing something.

Any thoughts?

 

Thank you.

 

 

[Lynn EA USTCP in Louisiana]

Did Covid restrict his job hunting abilities? 

[Dave T]

Good question. Do mean like travel restrictions or any other type of deterrent?

 

[Pacun]

NO, "we" mean that employers were not hiring.

[Pacun]

This is clearly a covid situation. Think about it.  In December 2019, taxpayer's plan was NOT to use that money and he made a bank to bank transfer. He knew then that he would not pay penalty if the money was withdrawn because he was over 55 and separation of services. Then the pandemic came and he was forced to take the money out. As you know Dec 2019 is/was around the corner. 

[Dave T]

I should have been more specific on one item. The retirement rollovers occurred in 2020 not 2019.

It still may be Covid related as you say but the IRA distributions weren't part of funds rolled over. 

[Kempoman]

1 hour ago, Dave T said:

T/P is 59 years old,. He received his termination notice in December 2019 but was technically still on the books until March 2020.

He rolls his retirement accounts without tax ( Code G on 1099R).

During the year he takes 4  distributions from an IRA totaling $50K ( taxable ) and at year end gets a 1099R  with Code  1, early withdrawal no exception  and thus $5K penalty.

I call client to tell them of this and they say financial advisor had told them there would be no penalty due job loss.  I don't see this as Covid related and they don't meet another Covid requirement so I think the penalty stands unless I am missing something.

Any thoughts?

 

Thank you.

 

 

This is a case of the advisor giving tax advice, but doesn't know the tax law.

 

[DANRVAN]

1 hour ago, Dave T said:

I don't see this as Covid related and they don't meet another Covid requirement so I think the penalty stands unless I am missing something.

Suggest you review Section 2202(a)(4)(A)(ii) of the CARES Act or notice Notice 2020-50.

[Lion EA]

Is he taking "substantially equal" distributions?

Is he having his financial advisor prepare his taxes?

[DANRVAN]

43 minutes ago, DANRVAN said:

review Section 2202(a)(4)(A)(ii) of the CARES Act or notice Notice 2020-50.

Sorry, I misunderstood your post.  Was he unable to work or find work due to quarantine?

Did he have a job offer rescinded or start date for a job delayed due to COVID-19?

[Dave T]

No, the 2020 IRA distributions were sporadic and not equal throughout the year.

Interesting second question. In 2019 I prepared their taxes but before I e-filed the return I was told to  hold off until I heard from them.  They had already paid the financial services company a flat fee to consolidate all investments and the co. also included tax prep in their fee so they went with them.

I assumed I wouldn't be doing their taxes this year but to my surprise they came back to me.

I don't man to be obtuse about this but it's the timing of the layoff prior to Covid that makes me wonder if the penalty can be abated.?

 

[Dave T]

Also, there was no job offer rescinded nor was there any quarantine.

[Lion EA]

If he was over 55, separated from service, and it was a 401(k), I think that's an exception to the penalty. But that doesn't work for an IRA. 

[Pacun]

If the roll over occurred at the beginning of 2020, that gives you more reasons to believe that your clients were not planning to touch the retirement plans but covid came strong and getting a new job was hard. Only few employers were hiring... a lot of them were laying off people and more people were on the market looking for a job.

[Lee B]

FAQ # 3 dated Sept 20, 2020:

 

"3. Am I a qualified individual for purposes of section 2202 of the CARES Act?

A3. You are a qualified individual if –

You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;

Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;

You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;

You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or

You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

Under section 2202 of the CARES Act, the Treasury Department and the IRS may issue guidance that expands the list of factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences. The Treasury Department and the IRS have received and are reviewing comments from the public requesting that the list of factors be expanded."

[DANRVAN]

On 3/5/2021 at 5:59 PM, Pacun said:

getting a new job was hard. Only few employers were hiring... a lot of them were laying off people and more people were on the market looking for a job.

but none of those reasons meet the criteria of Section 2202(a)(4)(A)(ii) of the CARES Act or notice Notice 2020-50 in determining that the taxpayer was unbale to find employment due to pandemic. 

[Pacun]

the regulations read that if you were medically or economically affected by Covid 19, no penalty and you can pay taxes in 2020, 2021, and/or 2022.

[Lee B]

3 minutes ago, Pacun said:

the regulations read that if you were medically or economically affected by Covid 19, no penalty and you can pay taxes in 2020, 2021, and/or 2022.

"Under section 2202 of the CARES Act, the Treasury Department and the IRS may issue guidance that expands the list of factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences. The Treasury Department and the IRS have received and are reviewing comments from the public requesting that the list of factors be expanded."

So do you have a cite for additional guidance the above quote refers to, because I haven't seen any or is this your unofficial opinion?

[Pacun]

I don't have a cite but I read the regulations and they say that the amount lost due to covid 19 didn't have to match the amount distributed. 

So, on other posts, I used an example that I got a call from someone who wanted me to prepare a W7. I charge $60 for W7, but DC government had shut down none-essential businesses. So the client went to MD where tax preparers were essential and I lost that income.  That event would have allowed me to take out $100K from my 401k and not pay penalty. "adverse financial consequences" to you, your spouse, dependent or household member. 

[Randall]

The way they've handed out money to profitable businesses, I'd call a hangnail qualified.  If it's questioned, it's questioned.  But the quotes seem to leave a lot to a judgement call on the individual.

[Lee B]

That's the thing about opinions, everyone has one

[Pacun]

58 minutes ago, Randall said:

The way they've handed out money to profitable businesses, I'd call a hangnail qualified.  If it's questioned, it's questioned.  But the quotes seem to leave a lot to a judgement call on the individual.

You are right.

We, tax preparers, keep complaining that we are doing the IRS' job and that we are the enforcers and we hate it. But I have noticed that we are excellent enforcers. Not only that, we are applying common sense and logic to COVID relief, which by itself doesn't make sense in many many cases. 

[Randall]

28 minutes ago, Pacun said:

You are right.

We, tax preparers, keep complaining that we are doing the IRS' job and that we are the enforcers and we hate it. But I have noticed that we are excellent enforcers. Not only that, we are applying common sense and logic to COVID relief, which by itself doesn't make sense in many many cases. 

Thanks Pacun.  I would ask a few questions and make reference notes.  But I wouldn't give him the 3rd degree trying to disqualify the person.

[GLJEANNE]

I would say it hinges are what his plans were back in Dec when he got the notice.  Was he planning to retire?  Or was he planning to look for other work.  If he was going to job-hunt, then it's Covid related, since almost no one was hunting or hiring last spring.

[DANRVAN]

3 hours ago, Pacun said:

the regulations read that, no penalty and you can pay taxes in 2020, 2021, and/or 2022.

The IRS has not posted any "regulations".  The authority comes from the Cares Act and the IRS notice referred to above.  The penalty exception and "three year rule" are allowed in specific cases only.  Unfortunately, there is no exception for an individual laid off prior to the pandemic and who could not find new employment because jobs were not available. 

However, he could qualify if was unable to work because of quarantine, unable to find child care, a job offer rescinded or start date for a job delayed due to COVID-19.

If you have read a source that says differently please post it here.