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Cessation of SEPP's prior to age 59 1/2 is clearly a "modification" which would requirew the application of §72(t)(4); e.g. the 10% penalty. On the other hand, one would think some mercy would be due as the taxpayer has just exhausted his or her IRA.

As some one else pointed out; this has never been tested in any IRS document of authority, nor has this issue risen to the courts; thus; at one level there is currently no answer.

At another level there is a very clear answer. The IRS would have to impose the 10% penalty in that the penalty is perscribed by law, e.g. it is in the tax code proper; thus, even if the IRS would like to show some compassion; they would be prohibited from doing so as the IRS does not have this level of flexibility as it might have in other matters. There are lesser issues in support of the penalty as well such as: (1) potential creation of a morale hazard; (2) goverment has no obligation of relieg to or for a taxpayers errors.

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