A Reader Asks #14: An SEP whoops!
A recent email from a CPA really has me scratching my head. He wrote:
Hello Art.
I did a Google search on SEP, and your article Reduce taxes now, pay for retirement later came up. I have a question on SEP's. A client called me today, for whom we filed a tax return on April 15th. We deducted a SEP contribution on her return, however, she informed me that she forgot to make the contribution.
What are her options? Can she contribute late and subject herself to possible penalties or does she need to amend automatically?
Please let me know your thoughts.
I have to admit that this is new territory for me. But I am not one to back down from a challenge. I emailed him back and told him that I needed to do a bit of research, but I'd let him know what I found.
This issue is a bit different than the concept I posted about back in February. Since the deadline to make contributions to an SEP is the tax filing date plus extensions, I wrote about a self employed person taking advantage of an extension to simultaneously reduce their taxes and fund their retirement. In this case, the client's tax filing deadline was not extended and has now come and gone. Their SEP contribution deadline has passed.
By the letter of the law it is too late to fund the SEP and the client needs to amend their tax return to remove the deduction they took for the SEP. This would cause an increase in their taxes due which needs to be paid along with whatever tax penalty the IRS will impose for paying late. One question arose when I called the CPA to discuss the matter. Instead of filing an amendment will the IRS allow you to apply for an extension, revoke your return, and later re-file before the extension deadline? If that is allowed administratively, then the client will land on their feet. They would have until September to fund their SEP and re-file the original return. I deferred to the CPA's expertise on the question but he had no personal experience to recall nor could he find any references to filing an extension after the deadline when a timely return was filed. He has asked the IRS for clarification and has promised to let me know what they say. When I find out I will share it with you.
I am a financial planner, not a tax expert. My only suggestion is to consult with your tax expert if you find yourself in a similar situation.
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