IRA Rollover Leniency Revisited

Take-Away: By now we all know the dangers of transferring retirement assets using a 60-day rollover. Miss the deadline, and you are treated as receiving a taxable distribution, and if you are under age 59 ½, plan on paying another 10% excise tax as well due to that early IRA distribution. Over the years Treasury has been pretty unforgiving when it comes to granting waivers to a missed 60-day rollover deadline, but Treasury’s rigid reaction to requested waivers seems to be mellowing. What Treasury says it will look at in its Revenue Procedures before it grants a waiver may no longer be a reliable guide for taxpayers to follow who have missed their 60-day rollover deadline. The best course is to always use a custodian-to-custodian transfer and thus completely avoid an IRC 60-day rollover crisis.

Source: Private Letter Ruling 201835017, issued June 6, 2018

Facts: The taxpayer received a distribution from her qualified plan in the form of a check when she retired from employment. The taxpayer failed to rollover the distributed funds to an IRA within the 60-day period following her receipt of the check as required by IRC 402(c)(3). She instead transferred the money, less the federal and state taxes that were withheld from the check, into a non-IRA savings account. The taxpayer later asked Treasury to waive the 60-day rollover deadline.

Law Dealing with Waivers:

• Treasury possesses the right to waive the 60-day rollover deadline where its failure to waive the 60-day requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the taxpayer. [IRC 402(c)(3)(B).]
• Revenue Procedure 2003-16, 2003-4 I.R.B. 359 provides that in determining if it should grant such a waiver, Treasury will consider all facts and circumstances which include: (i) errors committed by a financial institution; (ii) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; (iii) the use of the amount distributed (for example, in the case of payment by check, whether the check was actually cashed); and (iv) the elapse of time since the rollover distribution to the taxpayer occurred before the waiver was requested by the taxpayer.

Result: The taxpayer was granted a waiver by the IRS from the 60-day rollover deadline. No death, disability, hospitalization or incarceration of the taxpayer were involved. Rather, the taxpayer’s claimed the reason that she missed the 60-day window period in which to transfer the distributed qualified plan funds to a rollover IRA was due to her ‘reliance on her spouse for all financial and tax matters’ and marital difficulties that she experienced during the 60-day rollover period. Specifically, the taxpayer claimed that she relied on her spouse to make all financial and tax decisions, however on the date when the 60-day rollover period ended, she was separated from her spouse, and as a result she missed the rollover deadline. The taxpayer also had claimed that she had not used the funds for any other purpose.

While reliance on an advisor [lawyer, accountant] often will be viewed as a reasonable excuse for a taxpayer to avoid penalties otherwise imposed by Treasury, this decision is rare since the taxpayer claims that she relied upon her husband to make all investment and tax decisions for her; but rather than get ‘bad advice,’ arguably she got no advice (due to the taxpayer’s physical separation from her husband.) [This PLR does not provide any other facts that might suggest that there were other extenuating circumstances involved- just that her husband made all the financial decisions during the marriage, and the taxpayer was separated from him when the 60-day rollover deadline passed. Nor is it explained just how long that separation lasted prior to the 60-day rollover deadline.]

Conclusion: If you go back even 5 years you will find a very hard-nosed Treasury when taxpayers sought waivers from the 60-day rollover rule. Obviously relying upon a spouse to handle financial and tax matters is not covered by Revenue Procedure 2003-16 which pretty much describes the type of extenuating circumstances that are considered to be beyond the control of the taxpayer as a plausible explanation why the 60-day rollover deadline was missed. Now, apparently, a separation from a spouse when the rollover deadline arrives will suffice to induce a waiver from Treasury.  While I am not complaining about the result in this private letter ruling, what I do think is that it may be time for Treasury to issue an updated Revenue Procedure to replace Revenue Procedure 2003-16 if it is now, apparently, willing to be far more understanding to grant waivers when taxpayers rely on the type of situations and examples it provides when a waiver might actually be granted.