Have a client that has a company that owns three commercial buildings that she rents in Alaska. They have not filed taxes and are currently getting caught up for 2017, 2018, and 2019. During the preparation of these returns, it was discovered that the client has been making ineligible contributions to a Simple IRA. Although we are unable to find any 5498 documentation, we do know contributions were made at least for some of those years or prior but have been unable to determine the total amount of contributions or how long the Simple IRA has been in existence. Possibly since 2003 although yet to be confirmed. The believed balance of her current Simple IRA is about $250,000. We could go back and file tax deductible IRAs of $6,000 each but we still would be unable to burn through the entire $250,000 balance. Thus, potentially causing the 10% penalty for early withdrawal, she is under the age of 50, taxes and of course excise taxes. Has anyone had experience with this issue before and are there any strategies to unwind the Simple without creating any red flags with the IRS or ERISA? Does anyone have any other suggestions on the best way to handle this situation?

We also have the option of immediately rolling over the Simple IRA into a traditional IRA as soon as possible, closing out the Simple IRA and disclosing to the client that while this eliminates the compounding effect of the problem going forward, she still has not solved the original challenge and may get caught by either the IRS or DOL in penalties and back taxes for these ineligible contributions. While this solution seems the easiest and simplest, we do not want to put our client at undue risk if anyone has a better idea or solution. Thank you for your feedback so we know how to handle and communicate this issue with our client. Wanted to ensure there were no other options other than what we have knowledge of.

Thank you in advance for your assistance,