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George F. Bearup, J.D. Senior Legal Trust Advisor

30-Sep-16

IRAs – 60 day Rollover Relief

As I recently reported, last month the IRS actually showed that it had a heart when it issued Revenue Procedure 2016-47. It provides relief for plan participants and IRA owners who blow the 60 day IRA rollover period.

A plan participant or an IRA owner can pull money from their qualified plan account or their IRA, hold onto the money, and then deposit the money/amount in another qualified plan or IRA within 60 days, and not be treated as having received a taxable distribution [or penalties if they are younger than 59.5 years.] Since we are all human, often the withdrawn IRA funds do not make their way into a new qualified plan account or IRA within the 60 day window. As such, over the years, the IRS has been inundated with waiver requests from IRA owners to overlook their failure to abide by the 60 day window period.

But asking the IRS for a waiver of the 60 day window period entailed filing a Private Letter Ruling request; the IRS charges $10,000 as a user fee for a Private Letter Ruling, not to mention the additional cost of hiring someone to prepare the Private Letter Ruling request. In short, the costs to obtain a Private Letter Ruling usually greatly outweighed the amount that failed to qualify for the 60 day rollover window.

But last month the IRS provided new guidance to taxpayers who have blown the 60 day rollover period. Some quick take-ways of that Revenue Procedure 2016-47 follow:

  1. No special reporting is required by the IRA owner on their 1040 income tax return. Instead the IRA owner provides a self-certification to the IRA custodian into which the late deposit of IRA funds was made.
  2. The IRS intends to change its form 5498 for IRA custodians so that the custodians will report on that form if the custodian received a late IRA deposit. That is how the IRS will learn if an IRA owner blew the 60 day period.
  3. This self-certification applies to both IRA owners and qualified retirement plan participants who engage in 60 day rollovers.
  4. Rather than file something with the IRS, the IRA owner files a letter to the IRA custodian with which the IRA/retirement funds are deposited, which explains why the owner blew the 60 day window period. Some excuses will work, other excuses will not work- those safe-harbor excuses are provided at the end.
  5. There is no fee to pursue the self-certification. Contrast this with the ‘old way’ of obtaining an IRS waiver via a Private Letter Ruling- and paying a $10,000 user fee.
  6. This self-certification does not apply to IRA owners who attempt more than one IRA rollover in a 12 month period. Recall that a couple of years ago the Supreme Court surprised us [Bobrow], and also the IRS which had told us in its Instructions that it was okay to do so,  that multiple IRA rollovers in a 12 month period was permissible. The Supreme Court said that an IRA owner only is entitled to one IRA rollover in a 12 month period, regardless of the number of IRA accounts that taxpayer owns. [The IRS has since changed its Instructions telling us that only one rollover every 12 months is permissible.
  7. If the IRA owner does not qualify for a self-certification, meaning the taxpayer does not meet one of the safe harbor excuses provided in Revenue Procedure 2016-47, then the IRA owner can still pursue a Private Letter Ruling and request a waiver of the mandatory 60 day rollover window period- an pay a user fee.
  8. An IRA custodian which is presented with the IRA owner’s self-certification is not required to accept the late IRA rollover. That said, the IRA custodian is entitled to rely on the self-certification without out doing its own due diligence.
  9. Despite providing this roadmap the IRS is still entitled to reject an IRA owner’s self-certification.
  10. One question not answered by the Revenue Procedure is what happens if the IRA owner dies prior to completing the 60-day rollover.
  11. Some of the safe-harbor common excuses identified by the IRS in the Revenue Procedure that will qualify for self-certification follow:
  • Financial institution mistakes in processing the rollover
  • Postal errors
  • Misplacing or never cashing the rollover check
  • Depositing and retaining the rollover distribution in an account that is mistakenly believed to be a retirement account
  • The distributing IRA custodian failed to provide information needed by the receiving IRA custodian
  • Severe damage to the IRA holder’s principal residence, e.g. fire or flood
  • Death of a family member
  • The IRA owner’s serious illness or that of a family member
  • Incarceration
  • Restrictions imposed by a foreign country; and
  • An IRS levy of the rollover amount, where those proceeds were later returned to the IRA owner.

While all of this is good news for taxpayers, probably the best way to avoid all of the grief that surrounds a 60 day rollover is to arrange for a custodian-to-custodian transfer of IRA funds (or a qualified plan distribution) so that no check is ever issued to the IRA owner. That direct transfer of funds is not viewed as a rollover and thus the danger of missing the 60 day window period never materializes. Let me know if you have questions on Revenue Procedure 2016-47.