We have a client who has not filed income taxes since 2001. We are in the process of correcting this.

While reviewing his records, we found that the person over-contributed to his SEP in 2002. All future years contributions were correct - the full maximum contribution was made.

How do we correct the 2002 SEP contribution. Is this correct??? -

*the 2002 excess amount will carryover and be used to fund the 2007 SEP contribution;
*no additional tax penalty is assessed because a deduction for the over contribution was not claimed.

Any help on this is greatly appreciated!

The effect of the over-contribution is the imposition of the excise tax under Section 4973 of the Code on excess IRA contributions. You need to work through Section 4973 and the regulations thereunder to figure out how to address this situation.

I've been re-reading things and think my earlier assumptions were wrong. I now think we should do the following -

*carryover excess contribution until it can be used
*10% excise tax applies for all years the excess contribution is not used. THis should be reported on Form 5330.

Thank you!!! - I will check Sect 4973 now.

I believe the excess SEP contribution is now considered a Traditional IRA contribution and a 6% penalty applies for all years the excess amount was not used up under the IRA contribution limits. The 10% penalty for non-deductible contributions therefore will only apply for the first year (i think) so 16% for first year and 6% for each year thereafter until used up by Traditional IRA limits.