We submitted this letter to the Taxpayer Advocate Service (TAS) systemic issue reporting process, a legitimate, formal channel to bring this problem to the attention of the IRS
The ambiguity in IRS Notice 2022-6 regarding the payment timing, annuity-immediate (end-of-year) vs. annuity-due (beginning-of-year), creates significant risk for taxpayers using the Fixed Annuitization Method for substantially equal periodic payments (SEPP) under IRS Section 72(t).
The Ambiguity of Payment Timing:
Notice 2022-6 specifies only the mortality table and interest rate, leaving the critical third factor – the payment timing convention – unspecified. While the associated IRS website FAQ suggests using the annuity-immediate (end-of-year) convention, this is informal and not legally binding.
This contrasts with prior guidance:
– Rev. Rul. 2002-62 was also silent on timing, but its IRS website FAQ at the time suggested the annuity-due (beginning-of-year) convention.
– Notice 89-25 similarly suggested the annuity-due convention in its body example.
Risk and Systemic Problems:
This lack of explicit guidance forces taxpayers to choose between conflicting precedents or rely on non-binding FAQs, creating several problems:
Non-Uniformity: Taxpayers and professionals will apply the rule inconsistently, leading to widespread non-compliance.
Unfair Penalties: A miscalculation, even if based on a reasonable interpretation of informal or superseded IRS guidance, could be deemed a “modification,” triggering the harsh 10% recapture penalty on all past SEPP payments.
Increased Burden: Taxpayers must incur extra costs for professional advice, seek private letter rulings, or avoid this SEPP method altogether due to the ambiguity.
Recommended Solution:
TAS should recommend that the IRS immediately clarify Notice 2022-6 to explicitly specify the required payment-timing convention for calculating the annuity factor. This action is necessary to: ensure uniform application of the rule, protect taxpayers from unfair penalties and reduce the overall compliance burden.
The Administrative Nature of the Issue
The issue identified is administrative. The IRS and the Treasury Department have the authority to clarify ambiguous tax law through their own formal guidance process. This is typically done through mechanisms like issuing new or updated regulations, revenue rulings, or notices.
The IRS and Treasury’s Rulemaking Authority
- Congressional Delegation:
Congress writes tax laws in broad strokes and delegates the authority to the Treasury Department and the IRS to fill in the details through regulations and other formal guidance. This delegation is specified in the Internal Revenue Code. - Formal Guidance:
To address ambiguities or provide clarifications, the IRS and Treasury can issue new forms of guidance, such as:- Revenue Rulings or Procedures: Provide definitive clarification on how the law applies to specific facts or issues (e.g., payment timing for 72(t) annuities).
- Notices: A new notice could be issued to specifically address the ambiguity in Notice 2022-6 regarding the fixed annuitization method.
- Treasury Regulations: The most formal and legally binding form of guidance, subject to a public “notice and comment” period before finalization.
The Resolution Process
- TAS Recommendation:
Based on the received report(s), TAS would recommend to IRS leadership that the ambiguity in Notice 2022-6 needs to be clarified. - Priority Guidance Plan:
If the IRS and Treasury agree, the issue would be added to their Priority Guidance Plan. - New Guidance Issued:
The IRS and Treasury would then work to develop and release new guidance (e.g., a Revenue Ruling or a new Notice) that explicitly states the correct payment timing convention for the 72(t) annuitization calculation.
This process ensures that clarification comes from the proper legal authority, providing a binding answer for all taxpayers, rather than relying on inconsistent informal FAQs or superseded guidance.
Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Consult with a qualified financial advisor for personalized guidance.
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