IRA Rollovers- A Softening of a Harsh IRS?

Take-Away: You have repeatedly heard from me that the best way to transfer an IRA is to move the funds from the ‘old’ IRA custodian directly to the ‘new’ IRA custodian, and skip the 60 day rollover. Every year the IRS reports on IRA owners who for some reason end up blowing the 60 days in which to move the money to the ‘new’ IRA account and they end up paying taxes and often the 10% penalty. Or, they make the mistake of moving the money twice in a 12 month period, failing to remember that there is only one rollover every 12 months. But the IRS may be backing away (somewhat) from the harsh implementation of the 60 day rollover rule. See- PLR 201822033, released March 5. 2018.

Facts: A participant in an employee stock ownership plan (ESOP) retired in January and requested a lump sum distribution. In February, she deposited that distributed lump sum amount into a credit union account that she owned jointly with her husband. Part of those funds found their way into an IRA that she opened in late February, but the balance of the funds remained in the joint account, thus failing to be rolled into the IRA within 60 days of its receipt. This mistake was discovered the following August when the participant and her husband visited their CPA. The former participant then requested an waiver from the IRS of requiring that the lump sum be rolled within 60 days of its receipt.

60 Day Rollover Rule: IRC 402(c) governs IRA rollovers. Specifically IRC 402(c)(3)(A) provides the 60 day ‘window’ in which to complete an IRA rollover, which if followed means that the distributed amount will not be taxed to the participant-owner.

60 Day Waiver: IRC 402(c)(3)(B) gives the IRS authority to grant waivers from the 60 day rollover rule. But the IRS is not very forgiving when it is asked to grant a waiver to the 60 day rule. Revenue Procedure 2003-4 I.R.B. 359 sets forth the criteria that the IRS will consider when confronted with a 60 day rollover waiver request. Those facts or circumstances include:

Errors committed by a financial institution;
Inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country;
Postal error;
The use of the money distributed, e.g. was the payment by cash or check and whether the check was cashed; and
The time elapsed since the distribution occurred.

Taxpayer’s Excuse: I had to laugh when I read the taxpayer’s excuse for her failure to transfer all of her lump sum distribution into her IRA within 60 days. Per the IRS in this Private Letter Ruling: “The information and documentation submitted by the Taxpayer support her assertion that the failure to accomplish a rollover of a portion of total distribution amount within the 60-day period was due to her reliance on her spouse and her misinformed belief that she had until the end of the taxable year in which to complete the rollover.’ Apparently the husband told his wife that she had until the end of the year to roll the balance of her lump sum distribution into her rollover IRA, which was obliviously wrong. So much for listening to husbands!

Waiver Granted: What is surprising is that the IRS granted the waiver request. This is far more lenient than the IRS has ever been in the past in granting 60 day rollover waivers. Mistaken beliefs and stupid husbands would never in the past have passed muster as a sufficient reason given to grant a 60 day rollover waiver when you look at the criteria that is described in Revenue Procedure 2003-4.

Conclusion: It remains to be seen if when now have a kinder and more gentle and forgiving IRS when clients seek a waiver because they missed their 60 day rollover window. Maybe it is a kinder IRS when you consider the exorbitant fees that must be paid to the IRS to obtain a private letter ruling, which range from $2,500 to more than $10,000 depending upon the amount in question. Whatever the case, we may find that the IRS is not as difficult as we once thought when seeking waivers.