A 1. He will owe the IRS all of the 10% http://retirementdictionary.com/definitions/earlydistributionpenalty early distribution penalties that were waived under the SEPP. That is, he will owe the 10% penalty for SEPP amounts that were made during the three year period and any SEPP amounts taken under the program this year.
In addition, he will owe any interest that is assessed by the IRS on those penalties. The interest is usually calculated in the same manner as interest calculated on income tax for which a payment is made late, in which case the interest rate changes quarterly. Furthermore, the calculation is done as if the penalty was reported on the individual’s tax return for the applicable year. For instance, if the SEPP is busted in 2012 from a SEPP that was started in 2009, the interest would be assessed on the 2009 10% penalty from 4/15/10 on the first installment; interest on the penalty from 4/15/11 on the second, and interest on the penalty from 4/15/12 on the third.
It may be a good idea to file (late) IRS Form 5329 for the years that the distributions were taken, and let the IRS calculate the penalty and the interest. Having them perform the calculation may be much easier than if he tried to calculate it himself.
A 2. Since he has modified (violated the terms of) the SEPP, that SEPP should not be continued. He may start a new SEPP if he still needs income from his IRA on a steady basis. Before starting the SEPP, the he may want to consider the following:
• Whether it makes sense to split the IRA into two accounts, so that the SEPP is taken from one IRA and the second IRA is available in the event he needs to make ad-hoc withdrawals. Withdrawals made from the second IRA would not affect the SEPP. The reverse calculator at the following link can be used to determine how much is needed to produce pre-determined SEPP amounts http://www.72t.net/Sepp/Irc72tReverseCalculator.aspx
• The number of years that he will need to continue the SEPP. Bearing in mind that a SEPP must continue for five-years, or until he reaches age 59 1/2, whichever is longer
• Does it make better sense to take ad-hoc withdrawals and pay the penalties, instead of being locked into a scheduled payment? If he really needs that amount of income each year, and his retirement account is his only source of that income, then it seems he has no choice.
He may want to visit the SEPP forum at http://www.72t.net/Discussion/ViewPosts.aspx?A=2 . This is where the best SEPP experts meet to engage in SEPP related discussions. Most importantly, he should work with a financial or tax professional who is an expert on SEPPs.