February 22, 2023
IRS Waives Missed 60-day Rollover Due to Fraud
Take-Away: Victims of fraud may be able to avoid having the distribution taken from their IRA taxed, despite blowing the 60-day rollover rule, but only at the expense and delay of obtaining a Private Letter Ruling from the IRS.
Background: A rollover of funds from one IRA to another within 60 days is not a taxable distribution. [IRC 408(d)(3)(A)(i).] If the 60-day window is missed, then normally the distribution is taxable to the account owner, and perhaps also subject to the 10% early-distribution penalty if the account owner is not over the age 59 ½ at the time of the distribution. In a recent Private Letter Ruling the IRS waived this 60-day deadline because the IRA owner was the victim of fraud who withdrew the IRA funds as part of that fraudulent scheme.
Private Letter Ruling 202244029, August 9, 2022:
Facts: The IRA owner was trying to access her bank account when she received an alert on her computer directing her to contact a representative from an unidentified company. As instructed, the IRA owner contacted this individual (Stranger 1) at the company, who falsely claimed to work for the company. That Strange 1r told the IRA owner that hackers from a foreign country had downloaded illegal material onto her computer and had taken money from her bank account. This Stranger 1 then instructed the IRA owner to contact another individual (Stranger 2), which she did. Stranger 2 falsely claimed to be an employee in the anti-fraud department of the IRA owner’s bank. Stranger 2 then told the IRA owner that she would have to secure her funds to protect them from the hackers and that the illegal material found on her computer was a federal crime. The IRA owner was also told to contact yet a third Stranger, which she did. The IRA owner was told by the Stranger 3 that that he was an officer with a federal agency and he assured the IRA owner that once they had secured all of her assets, he would give her a check to reimburse her for the withdrawals that were made from her accounts. Both Strangers 2 and 3 told the IRA owner “not to tell anyone” and she was also warned that “she would be arrested for the illegal material on her computer if she contacted law enforcement.” At this point, as instructed by Stranger 2, the IRA owner withdrew money from her non-IRA accounts. In addition, the IRA owner, following the Strangers’ instructions, then withdrew an amount from her IRA. After the 60-day period for the distribution from the IRA had expired, the IRA owner was then told by Strangers 2 and 3 that she could tell her spouse about the IRA withdrawal. The Strangers soon disappeared with the IRA owner’s funds; only then did she tell her husband, and her husband started to ask questions. Those follow-up inquiries caused the IRA owner to learn that the phone numbers used by Strangers 2 and 3 had been reassigned or were no longer in service. Only then did the IRA owner contact law enforcement and report the fraud.
Requested Relief: The IRA owner requested in her PLR request that the IRS waive the 60-day rollover requirement of IRC 408(d)(3) with respect to the distribution from her IRA.
Taxation of Distribution: Any amount distributed from an IRA is included in the gross income of the payee. [IRC 408(d)(1).]
60-day Exception: However, a distribution from an IRA will not be subject to immediate income taxation to the individual for whose benefit the IRA is maintained, if the entire amount received (including money or other property) is paid into an IRA for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution from their IRA. [IRC 408(d)(3)(A)(i).]
Waiver of 60-day Rule: The IRS possesses the authority to grant relief under IRC 408(d)(3)(1). This requested relief is granted under Revenue Procedure 2003-16, for which a private letter ruling (PLR) can be requested. The Procedure provides, in part, that the IRS will issue a ruling that waives the 60-day rollover requirement in cases where the failure to waive such a requirement would be against equity or good conscience, including casualty, disaster or other events beyond the reasonable control of the IRA owner. In the determination whether to grant a waiver of the 60-day rollover requirement, the IRS will consider all relevant facts and circumstances, including: (i) errors committed by a financial institution; (ii) the 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 cashed); and (iv) the time elapsed since the distribution from the IRA occurred.
IRS Grant of Waiver: The IRS found that this was a case which was appropriate to grant relief from the 60-day rule. The IRA owner provided sufficient proof that she was unable to accomplish a 60-day rollover because she was the victim of a fraud scheme. The IRA owner was granted 60 days from the issuance of the Private Letter Ruling in which to contribute an amount, not to exceed the amount that she initially withdrew from her IRA, into an IRA, in order to avoid income taxation.
Conclusion: Unfortunately the PLR does not identify what evidence or proof of the fraud that the IRA owner furnished to the IRS as part of her request for relief from the 60-day rollover rule. Nor is the amount withdrawn from her IRA identified. We just know that the request for a private letter ruling from the IRS is an expensive proposition with a 5-figure ‘user fee’ along with the legal and/or accounting fees incurred to file the request. Sadly, we will probably see many more cases like this one where IRAs are targeted in sophisticated fraud schemes.