I recently received a call from a financial advisor I know that has a client who has a problem with their tax return. The Broker Dealer did not report the 72T distribution correctly as an exemption to the early withdrawal penalty.
For those who do not know; a 72t distribution is, this is a reference for the Internal Revenue Code (IRC) Section 72 part t. The most popular provision of this code section, (actually IRC Section 72(t)(2)(A)(iv)), is known as a Series of Substantially Equal Periodic Payments.
A 72T is a method by which you can access your IRA funds prior to age 59.5. In order to take advantage of this rule, you determine the amount of the annual distribution from your IRA (this is done in a specifically prescribed manner) and then begin taking the distributions. Once you start the distribution you have to keep it going for the longer of five years or until you reach age 59.5.
But since H&R Block does not question clients about such things they missed the coding error. Based on what was learned from talking with Broker Dealer they always code the 1099-R’s incorrectly. They default to the penalty being in place forcing the clients to address the issue.
So HRB should have filed a 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts) as part of the tax return. I am sure they would have charged extra for this, but they will also now charge for the amended return that is required assuming the client wants the penalty money back.
Remember when you are working under special circumstances make sure you are communicating effectively with your tax professional. Also make sure that your tax professional is a tax professional and not a cash wash attendant playing tax professional. Seek qualified council.