Taxpayer-friendly guidance on the 60-day IRA rollover waiver.

Since the genesis of IRAs, amounts received from an IRA or qualified plan could be rolled over tax free, under Sec. 408(d)(3)(A)(i), if the rollover was made within 60 days of the date of the receipt of the distribution. In a steady stream of cases and letter rulings, the IRS has consistently argued that it does not have the authority to waive the 60-day requirement, except--as provided in Secs. 7508(a) and 7508A(a)--during military service in a combat zone or on the occurrence of a Presidentially declared disaster. The Service and the courts have relentlessly enforced the 60-day rule, even when a taxpayer clearly intended to complete the rollover and acted in good faith, and the failure to complete it was entirely beyond his or her control. In only one case, the Tax Court allowed a completed rollover when a financial institution reported incorrectly, due to a bookkeeping error; see Wood, 93 TC 114 (1989).

Congressional Relief

In the Economic Growth and Tax Relief Reconciliation Act of 2001, Congress provided relief, by adding a hardship exception in Sec. 408(d)(3)(1). According to the conference agreement (H. Conf. Rep't No. 107-16), this new provision would allow the IRS to waive the 60-day rollover period if failing to do so would be against equity or good conscience, including cases of casualty, disaster or other events beyond a taxpayer's reasonable control. For example, the Secretary is empowered to issue guidance providing objective standards for a waiver of the 60-day rollover period for (1) a period during which the participant had received, but not yet cashed, a check; (2) financial institution errors; or (3) situations in which the taxpayer was unable to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or a postal error.

IRS Guidance

The Service issued Rev. Proc. 2003-16, which explains (1) how taxpayers can apply for a waiver of the 60-day rollover period for IRAs and pension plan distributions and (2) when a situation merits an automatic waiver. Under the procedure, the taxpayer applies for a hardship exception waiver via a letter ruling, as outlined in Rev. Proc. 2003-4, and pays a user fee ($95 for 2004), as described in Rev. Proc. 2004-8.

In determining whether to grant a waiver, the Service, closely following the conference report language, states that it will consider all relevant facts and circumstances. In addition, it will assess how a taxpayer used an amount distributed (e.g., for a payment made by check, whether the taxpayer cashed the check), and the time elapsed since the distribution. Automatic approval is granted (and, thus, no application to the Service is needed) when a valid rollover would have been completed but for a financial institution error. Whether automatic or through application, the distribution must have occurred after 2001.

Waivers Granted

In the last few months, the Service has issued a number of letter rulings waiving the Sec. 408(d)(3) 60-day rollover requirement and providing the taxpayer with a flesh 60-day rollover period beginning on the letter ruling's date. In each case, the taxpayer established that no other amount was distributed from the IRA or qualified plan within the one-year period since the original distribution, as required under Sec. 408(d)(3)(B). The IRS released the first tour rulings in October 2003; in three of them, it granted waivers for institutional errors.

In Letter Ruling 200401020, a taxpayer requested a transfer of funds from his brokerage account to his personal checking account, but the financial institution mistakenly made the transfer from his IRA. In Letter Ruling 200401023, a taxpayer moved her IRA from one bank to another, seeking a higher interest rate; the receiving bank mistakenly placed the amount in a nonretirement certificate of deposit. In Letter Ruling 200402028, a taxpayer attempted to move his IRA from one company to another, but the receiving company mistakenly set up a regular brokerage account.

In the fourth ruling (Letter Ruling 200402029), the Service granted a waiver for incapacity. A taxpayer received an IRA distribution at a time when she was confused and suffering from the effects of back surgery, which required lengthy hospitalization. As a consequence, the Service ruled that she was not able to reasonably comply with the 60 day rollover requirements.

The Service has continued to issue a stream of letter rulings and increased the diversity of taxpayer situations in which it is granting waivers. For example, in Letter Rulings 200407025, 200406049 and 200406050, it granted waivers for incapacitated taxpayers who were older and hard of hearing, mentally disabled, or recently widowed and suffering illness. Other rulings involving institutional errors included Letter Ruling 200406051, in which a retired county employee received a "surprise" 2002 Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., from his Sec. 457 plan administrator. The administrator then issued a distribution check to the taxpayer that he never received. The replacement check came too late to meet the rollover requirement.

New Categories

Other recent rulings have introduced new categories of situations in which the Service has been granting waivers.

Erroneous investment advice: In Letter Ruling 200407023, a 60-year-old widow with no financial knowledge or experience intended to withdraw an amount from one IRA and deposit it into another, until a bank employee suggested that she deposit the amount into a regular account, to take advantage of a higher interest rate. Following this advice, the widow, who intended to comply with the 60-day rollover rule, deposited the funds into a regular account. When the widow was preparing her 2002 return, she realized that the bank employee had given her erroneous advice that made the distribution taxable. Under Sec. 408(d)(3)(I), the Service ruled that the taxpayer demonstrated that her inexperience in this type of financial transaction and her trust in the investment advice of a bank employee prevented her from depositing the distribution into an IRA within the required 60-day period. The Service attributed the failed rollover solely to the bad investment advice and ruled that a failure to waive the 60-day requirement would be against equity or good conscience.

Lack of information provided by plan administrator: In Letter Ruling 200405013, the taxpayer participated in her employer's Sec. 401(k) plan. "While she was on a military assignment, the employer's stock declined in value and the taxpayer's plan account dropped below a $5,000 required minimum. The plan's administrator mailed a distribution check to the taxpayer's U.S. base in November 2002. The taxpayer learned about this distribution on Dec. 13, 2002, when she returned to that base. A letter from the plan administrator did not explain that the distribution was the result of the plan's required minimum cash out provision. The taxpayer deposited the distribution in a savings account until she could determine what had happened. On Dec. 23, 2002, she was reassigned to another base and traveled extensively. Several months passed before she had an opportunity to consult with the base legal officer about the matter. On March 24, 2003, the taxpayer deposited the amount in an IRA and learned that the 60-day period for a tax-free rollover had expired. In granting a waiver, the Service cited the plan administrator's failure to inform the taxpayer as to the nature of the distribution.

Inclement weather: In Letter Ruling 200406054, a Maine taxpayer went to the bank holding her IRA and withdrew from it on Dec. 18, 2002. She had intended to use the amount to purchase a condominium, but later changed her mind and decided to re-deposit the entire amount in her IRA. While she was preparing her 2002 return, around Feb. 15, 2003, the taxpayer realized that she needed to roll over the amount back into the IRA within the 60-day period allowed, to avoid any adverse tax consequences. She intended to go to the bank on Feb. 17, 2003, to complete the rollover, but that day was a national holiday. The taxpayer still had one day left on the original 60-day rollover period and prepared to go to the bank the next day. However, Maine experienced a major paralyzing snow blizzard. Those weather conditions made the trip to the bank impractical and unsafe. Finally, on Feb. 19, 2003, the taxpayer arrived at the bank to roll over the amount. However, she was told that this was impossible, because the 60-day rollover period had expired, by one day. The Service granted the taxpayer's request for a waiver, citing the severe weather conditions that prevented her from complying with the 60-day requirement.

Conclusion

The availability of taxpayer relief in these situations is a clear indication of the Service's plan to apply liberally its authority to grant waivers under the hardship exception. However, recently, Letter Rulings 200423038 and 200422058 denied such waivers.

At press time, the IRS has released many favorable rulings. In some, the error or failure to comply with the 60-day rollover rule was discovered by taxpayers while conferring with their tax advisers during return preparation. Now, advisers have a growing promise of relief for clients whose circumstances qualify for the hardship exception.

FROM JANET W. TILLINGER, CPA, PH.D., TEXAS A&M UNIVERSITY--CORPUS CHRISTI, CORPUS CHRISTI, TX (NOT AFFILIATED WITH BAKER TILLEY INTERNATIONAL)