Decisions — Timing Matters

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Image source: openclipart.org

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The tax code is replete with deadlines and due dates—so many that sometimes even the IRS gets them wrong. For example, last year the tax court found the IRS was incorrectly applying the 60-day rollover rule. That rule governs the amount of time a taxpayer has to replace, without penalty, an amount taken from an Individual Retirement Account. While the IRS had the time limit right, the rule had been interpreted to mean a taxpayer could do multiple 60-day rollovers if the taxpayer owned multiple IRAs. The court said that interpretation was incorrect. Instead, a taxpayer could only use the rollover rule once in a twelve-month period.

If you make a mistake and run afoul of the 60-day rollover rule, you’re generally subject to a penalty of 10% of the amount of the distribution. However, the IRS can waive the 60-day requirement. Internal revenue code section 408(d)(3)(I) applies when assessing the penalty would be against equity or good conscience, such as in situations of casualty, disaster, or other events beyond your reasonable control.

To request a waiver and avoid the penalty, in most cases you need to apply for a letter ruling and pay a fee. The IRS will consider various facts, including whether the error was committed by a financial institution; whether the error was due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; the use of the amount distributed; and the time elapsed since the distribution occurred.

Here are three recent waiver requests.

1.

In Letter Ruling 201523025, the taxpayer, a fireman, took a distribution from his IRA in January. He deposited the money into a non-IRA account. He intended to roll the money into another IRA. But in February, before the 60 days were up, he suffered a medical injury at work and was put on medical leave.

He was on medical leave until March, which was after the 60-day rollover period expired. During that time he cared for his disabled spouse. He used the IRA withdrawal to cover personal expenses and redeposited the withdrawal amount into a new IRA in September.

The taxpayer says the delay was due to his medical injury and he requests a waiver of the 60-day rule.

WHAT WOULD YOU DECIDE?

Make your selection, then hover your mouse
over the link beneath “The IRS Ruling”

or

THE IRS RULING

For a full explanation, hover your mouse over the link below

2.

In Letter Ruling 201523024, the taxpayer owned an IRA which was a certificate of deposit. When the CD matured in October, the taxpayer withdrew the money. He intended to roll over a portion of the withdrawal to an IRA with another bank.

Four days later, the taxpayer met with a representative of the new bank and selected a long-term income fund. He thought he had completed the rollover.

When the taxpayer prepared his income tax return the following year, he discovered the new account was not an IRA. The taxpayer submitted an “IRA Managed Proposal” that the bank representative gave him when he selected the new IRA fund.

The taxpayer says his failure to complete the rollover properly was due to miscommunication with the representative of the new bank and he requests a waiver of the 60-day rule.

WHAT WOULD YOU DECIDE?

Make your selection, then hover your mouse
over the link beneath “The IRS Ruling”

or

THE IRS RULING

For a full explanation, hover your mouse over the link below

3.

In Letter Ruling 201523023, the taxpayer received a distribution from her IRA on December 5. Her intent was to consolidate and roll over the amount into another IRA.

On February 1, within the 60-day period, the taxpayer wrote a check to the new IRA trustee. On February 26, the IRA trustee returned the check, stating that “starter” checks were not acceptable.

The taxpayer sent another check from a different bank account. That check cleared on March 7 and was deposited into the new IRA. The taxpayer says the amount has not been used for any other purpose and remains in the new IRA.

The taxpayer submitted a copy of the returned check as well as documentation indicating the check was to roll over the withdrawal into the new IRA.

The taxpayer says the failure to accomplish the rollover was due to the administrative procedure of the new trustee. She requests a waiver of the 60-day rule.

WHAT WOULD YOU DECIDE?

Make your selection, then hover your mouse
over the link beneath “The IRS Ruling”

or

THE IRS RULING

For a full explanation, hover your mouse over the link below

***

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

***

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Sorry, wrong answer :(
Right answer!
No, the waiver should be denied.

The information presented and the documentation submitted indicate that the distribution from the IRA was used as a short-term, interest-free loan to cover personal expenses incurred by the taxpayer.

The committee report describing legislative intent indicates that congress enacted the rollover provisions to allow portability between eligible plans including IRAs.

Using a distribution as a short-term loan to cover personal expenses is not consistent with the intent of congress to allow portability between eligible plans. Thus, the information presented does not demonstrate circumstances that would justify a waiver of the 60-day rollover period.

Accordingly, the service hereby declines to waive the 60-day rollover requirement with respect to the distribution from the IRA. Thus the amount cannot be rolled over into an IRA.

The distribution must be included in the taxpayer’s gross income for the taxable year.

Right answer!
Sorry, wrong answer :(
Yes, the waiver should be granted.

The information presented and documentation submitted by the taxpayer are consistent with his assertion that his failure to accomplish a timely rollover was caused by a miscommunication with a representative of the bank which led to the deposit being made into a non-IRA account.

Therefore, the taxpayer is granted a period of 60 days from the issuance of this ruling letter to contribute the amount into a rollover IRA. Provided all other requirements of section 408(d)(3) of the code, except the 60-day requirement, are met with respect to such contribution, the contribution will be considered a rollover contribution.

Right answer!
Sorry, wrong answer :(
Yes, the waiver should be granted.

The information presented and documentation submitted by the taxpayer are consistent with her assertion that her failure to accomplish a timely rollover was due to the new trustee’s administrative procedures of not accepting “starter” checks, which resulted in the withdrawal not being rolled over into the new retirement account within the 60-day period.

Therefore, the service hereby waives the 60-day rollover requirement with respect to the distribution from the original IRA. Provided all other requirements of section 408(d)(3) of the code, except the 60-day requirement, are met with respect to such contribution, the contribution will be considered a rollover contribution.

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