The owner of an S-corp funded his SEP during 2000. When it came time to file his tax return (with extensions on 9/15/01) he decided he doesn't have the money to contribute for eligible employees and would like his contributions returned to the S-corp. Can he have the contributions returned? Any penalties? If he gets a 1099-R in 2001 from the IRA custodian, what do you do with it?

The trustee would not issue a check to the Sub S. The amount should be reflected in boxes 1, 3, & 5 of his or her W-2. If not the 10% penalty for nondeductible contributions would apply. The amount in the IRA is also an excess and would appear to be subject to the 6% cumulative nondedeuctible excise tax penalty since it was not corrected timely (reduced by any allowable annual IRA contribution). Hope this helps.