- 8,707
And the agent is liable for errors and ommissions.
72(t) Not Allowed After 1035 Exchanges
- Thread starter Drifting
- Start date
And the agent is liable for errors and ommissions.
- 10,711
Yep, great point. As agents we do our due diligence much more than a customer service rep who is not personally liable.
If our advice causes a client to incur penalties we can be sued.
Having someone on your side with skin in the game makes a huge difference.
- Thread starter
- #33
UPDATE; Spoke to a "more knowledgeable" rep at Vanguard and they didn't understand why it would be a problem to continue the SEPP program. He told me that it must have been a problem on Sun America's end. So I called and spoke to a "higher up" at Sun America and they didn't understand why it would be a problem either because I never took money out of the annuity (just an exchange). That person later called up Vanguard and found out that Vanguard apparently just needs a letter from Sun America. So I'm holding out hope that when Vanguard gets this letter then everything will be fine and I won't have to pay these back taxes. There's so many cooks in this kitchen that I don't know who to believe and I'm not holding my breath over this one, but they are supposed to get back to me tomorrow, hopefully with good news.
- 10,711
Hopefully you wont have to pay the back taxes. But I recommend you get an answer straight from the compliance department. If it isnt from the compliance department, the answer means nothing, because it will have to pass through compliance before being approved. That is what happened to you the first time, reps told you one thing, then compliance reviews it and comes back with the Regs and says no.
The most recent Regs are pretty clear on a 1035 exchange during SEPPs. I will be highly surprised if you dont have to pay the back taxes.
At this point you need to ask to speak to the compliance department. They are the ones who say yes or no to the situation.
You can have the rep transfer you to compliance most likely.
But get a CPA to review the situation... a true CPA (or better yet a tax attorney).
Give them this link: Internal Revenue Bulletin - March 31, 2008 - Rev. Proc. 2008-24 which is the IRS Procedural Guidance for partial transfers of Annuities.
This link is important because it directly contradicts what you were just told in your last call.... I would give this to the person you speak with in Compliance Dept.
This procedural guidance specifically says that what you did cant be considered a 1035. It is considered a withdrawal of funds to buy a new contract.
Just because you filled out 1035 paperwork, does not mean the IRS considers the transfer a 1035.
Sun America has filed it as a 1035 because that is how the paperwork was filled out. But what the IRS says is a different story.
I would bet money that if you talk to a CPA or Tax Attorney and have them investigate they will say you owe the taxes. (I hope not though)
The IRS procedural guidance specifically states that a 72(q)(2)(D) can not be transferred under a 1035 exchange.
Heres the thing.
You most likely can restart the SEPPs. But that doesnt mean it is a continuance of the old SEPPs and that you didnt break the former exclusion you had set up.
Also, the two companies you are dealing with are not tax advisors.
Just because they tell you that you dont owe taxes does not make it true. The IRS will come after you, not them, if you fail to pay what you owe.
I have a feeling that once the current plan reaches Compliance for approval, they will say you can begin new but not continue old. Either way I would double check with a tax attorney or CPA.
But do please keep us updated!
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I hate to beat a dead horse, but you are a textbook example of why an agent can be so valuable to use.
If you had an agent, they would act as quarterback for you and you would act as coach. You tell the QB what needs to be done, they go out on the field and deal with the players/opposing team, and get it done.
An agent could call compliance directly and get a direct answer from them.
Then all this time and energy you have spent could have been spent on something more productive or enjoyable, because the agent would be the one coordinating, not you.
And since agents deal with this stuff on a regular basis, we are able to get it sorted out quicker than a client can. Especially since we are not stuck with a random CSR who makes $12/h.
I actually might write an article about your situation on my annuity website Fixed Annuity 4 Me | The best Fixed Annuities available
So it can help illustrate the pitfalls of not working with a trusted & knowledgeable agent.
(obviously I dont know any personal data about you, just the general situation.... hopefully you dont mind!)
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- Thread starter
- #35
Aside from making me pay what I owe, they wouldn't penalize me anything extra would they? These companies may not be tax advisers but I'm guessing they might be liable for any IRS penalty I might have to pay due to their mistake (but not the back taxes themselves). After all they issue me the 1099-R's and what not.
By the way they are saying that as long as I don't take anything out for myself (the funds are transferred in full to Vanguard) and if it hasn't been less than 180 days since my last systemic withdrawal then it's supposed to be acceptable to do a 1035 exchange. They are also saying that it wasn't a "tax code issue" that fouled this up, but rather something to do with insurance company capabilities to facilitate the request. I'm confused but that was I was told. Vanguard's compliance department is supposed to get on it in a working day or two. The I'll report back for those who are trying to learn about this stuff.
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- Thread starter
- #36
So the verdict from Vanguard is that they can't do anything for me because Sun America interpreted my 1035 exchanges as having "modified" the SEPP program and so they are going to file a 1099-R calling it as potentially taxable. They said that I can have my CPA make their case to the IRS that my 3 years of withdrawals should not be taxable. Not sure what my CPA will say about it or if the whole effort to dispute it will be a waste of money. I always thought tax rules would be cut and dry, but Vanguard says that they are not. I find it hard to believe that this situation has never come up before. Why wouldn't there be a case precedent?
Anyway if my CPA recommends disputing it with the IRS then I guess it will be next year before I know.
Anyway if my CPA recommends disputing it with the IRS then I guess it will be next year before I know.
- 10,711
They make statements over and over in the paperwork you sign that they are not tax advisors and that you should consult your own CPA if you have any specific tax questions.
But when they tell you that something is kosher with the IRS, and it is not. The best thing to do is write a letter to the president of the company.
I know that sounds odd and it sounds very unlikely that the president of an insurance company actually reads their mail... but I promise you that if you hand write (neatly) a letter and mail it to them it will get read 99% of the time. (it might take a few weeks).
I have done this myself a few times and it has always worked.
Just explain that the rep (Vanguard) told you that you could continue the SEPPs, but you actually could not. Now you owe X amount in taxes and do not feel that you should be totally liable for them. And that you are very disappointed with the customer service experience so far with their company.
That is your best chance.
The other option is to send a letter to the head of customer service or to the head of compliance. But these are people that are not as motivated to make things right as the pres.
Yes, they do issue 1099Rs. But the local business down the road from you also issues 1099Ms to contract employees.... does that make them Tax Advisors? (you see the argument at hand here?)
Yes, they do incur some liability. But at the end of the day you are liable for your taxes. Even with advice or filings from a CPA, you are liable for any fines. Some CPAs will help cover fines that are their fault. And they do have E&O. But at the end of the day you still have to collect and prove that you performed your due diligence in the matter as well.
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And that is exactly what the law says they should do. Again, Sun America has vastly more experience with SEPPs than Vanguard. Sun America will know exactly what to do in this situation.
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It is most definitely a waste of time and money to contest this. I doubt the CPA would be willing to. The law is clear.
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Lol. No, unfortunately lots of tax law is grey and murky. Especially if there is no case precedent.
But as I pointed out earlier, there is actually clear guidance on this from the IRS. And yes, it is based on case law.
Internal Revenue Bulletin - March 31, 2008 - Rev. Proc. 2008-24
Conway v. Commissioner 111 T.C. 350 (1998), acq., 1999-2 C.B. xvi,
The link is the IRS Guidance based on the case Conway v. Commissioner.
I summarized it in my earlier posts. It is clear. SA is right, Vanguard is just trying to save face at this point. The law is clear. But when you deal with unlicensed and poorly trained customer service reps, they often know just enough to be very dangerous. (as you have found out)
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- Thread starter
- #38
UPDATE: Now I've spoken to 2 accountants who both think that I should NOT be taxed the 10%. One accountant says that he's dealt with this before and it's "normal" for an insurance company to incorrectly code it as an early distribution. But when filing your taxes you just attach a letter with documentation explaining that it's not an early distribution.
Another CPA showed me this document. If you can't continue a 72(q) then why would this insurance company have it as an option? See page 4.
http://www.mrannuity.com/download/IUS/iusTi.pdf
With regard to Conway VS Commissioner, here's a quote "Additionally, the taxpayer was not subject to the 10% penalty tax under section 72(q)"
http://www.rohrerandassociates.com/Sales Ideas\Conway-vs-Commissioner.pdf
Yet a 3rd CPA at first thought I am screwed as far at back taxes on the 72(q) but upon further research he thinks I may be OK. I am going to have him review everything in detail. Might have something to do with this tax code http://www.charitableplanning.com/document/675793
Another CPA showed me this document. If you can't continue a 72(q) then why would this insurance company have it as an option? See page 4.
http://www.mrannuity.com/download/IUS/iusTi.pdf
With regard to Conway VS Commissioner, here's a quote "Additionally, the taxpayer was not subject to the 10% penalty tax under section 72(q)"
http://www.rohrerandassociates.com/Sales Ideas\Conway-vs-Commissioner.pdf
Yet a 3rd CPA at first thought I am screwed as far at back taxes on the 72(q) but upon further research he thinks I may be OK. I am going to have him review everything in detail. Might have something to do with this tax code http://www.charitableplanning.com/document/675793
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