IRS Offers Relief From Missed Rollovers…

Except for certain distributions from a Roth plan, all retirement plan distributions are generally taxable. However, the Internal Revenue Code (the”Code”) provides that, if certain distributions from a retirement plan, such as an Individual Retirement Account (“IRA”), are “rolled over” to another or the same IRA within 60 days of the distribution, no income tax is imposed. For example, Bob is age 49 and he needs a $10,000 distribution for a down payment for a car. He takes the distribution from his IRA. If he deposits $10,000 into his IRA within 60 days of the distribution, then he will not be subject to income tax on the distribution.

Previously, the IRS could waive the 60 day requirement if the failure to waive would be against equity and good conscience. Revenue Procedure 2003-16 provides that the Internal Revenue Service (“IRS”) could review all relevant circumstances such as death, disability, hospitalization, incarceration, postal error or restrictions imposed by a foreign country. However, the taxpayer would have to request such relief through a private letter ruling (“PLR”). Until recently, the IRS fee for a PLR, not including the professional fees for the preparation of a PLR, ranged from $500 up to $3,000, depending on the rollover amount . Recently the reduced IRS fees for rollover PLRs were eliminated and the fee is now $10,000!

Fortunately, the IRS recently published Revenue Procedure 2016-47  which permits a taxpayer to “self certify” to the plan administrator the reason for the improper or delay of the 60 day rollover. The specific reasons are as follows:

1. Error committed by the financial institution making the distribution or receiving the contribution.
2. Distribution was made by a check that was lost or misplaced.
3. Distribution was deposited into an account that the taxpayer thought was a retirement account.
4. Taxpayer’s principal residence was severely damaged.
5. Member of taxpayer’s family died.
6. Taxpayer or member of family was seriously ill.
7. Taxpayer was incarcerated.
8. Restrictions imposed by a foreign country.
9. Postal error.
10. Distribution made by tax levy.
11. Party making the distribution delayed providing required information to the the receiving plan or IRA to complete the rollover despite taxpayer’s reasonable efforts to obtain the information.

To qualify for the “self certification”, not only must the reason be listed above, but the taxpayer must not have been previously denied a waiver by the IRS for the distribution, and must complete the rollover as soon as possible after the reason is no longer preventing the taxpayer from completing the rollover. If the taxpayer completes the rollover within 30 days after the reason no longer prevents the rollover, then the taxpayer is automatically deemed to comply with this last requirement.

While this revenue procedure is great help, a taxpayer can not abuse these “self certifications”. If a taxpayer is  audited and the IRS determines the taxpayer made a material misstatement or the specific reason did not prohibit the taxpayer from making a rollover or the rollover was not completed within a reasonable time, then the IRS can refuse to waive the time period and a taxpayer will not only be liable for the income tax, but also penalties and interest.

ADVICE: If you or your client has missed the 60 day rollover for any reason, then be sure to review this new revenue procedure. You want to save the cost of a PLR.  However. be aware that certain reasons are NOT listed, such as a taxpayer’s death. If the reason is not listed, then a taxpayer will have to request a PLR.

WORD OF THE WEEK: Private Letter Ruling (“PLR”) is a request made by a taxpayer to the IRS for advice on a proposed transaction. If a taxpayer has a tax issue with the IRS, prior to completing a certain action (i.e. paying the required taxes), then the taxpayer can request the IRS to rule on that tax issue. The PLR is the letter the IRS sends back to the taxpayer, which explains the rulings and the rational for the decision. The PLR is specific and applicable to only that tax situation and taxpayer. PLRs directed to other taxpayers cannot be used as a precedent by another taxpayer regarding his or her own issue and does not bind the IRS to take a similar position when dealing with different taxpayers. The IRS generally publishes in the first revenue procedure of the year what the IRS will and will not rule on.

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