Today we welcome first time guest blogger Karla Hunter. Karla runs the tax controversy and resolution practice at Hopp Accounting & Tax Service PC in Elgin, Illinois. Prior to joining Hopp Accounting she provided assistance to low-income taxpayers through an internship at Chicago Kent College of Law Low Income Tax Clinic followed by volunteering with and then serving as the Director of Tax Controversy for Administer Justice Low Income Tax Clinic.
She writes today about an innovative and taxpayer-beneficial procedure the IRS has recently adopted. Many taxpayers miss the window for rolling over their IRA. Congress decided that the IRS could waive the failure to meet the statutory rollover period. The Congressional grant here to the IRS is fairly unique. Congress has not given the IRS the explicit authority to waive time periods that it sets in very many settings. Another procedure where Congress has made this grant, the financial disability provision in IRC §6511(h) still suffers from heavy-handed administrative procedures. The procedure the IRS previously used for granting rollovers made it difficult for many taxpayers who did not have the money to pay for a private letter ruling. After its recent rate hike for PLRs, the procedure for waiving roll overs was clearly broken. The new waiver procedures Karla describes below represent a taxpayer-friendly way to make the waiver meaningful and better than it has ever been. Kudos to those involved at the IRS. Keith
On August 24, 2016 the IRS issued Rev Proc 2016-47 that fixed the problem of failed retirement account rollovers that missed the 60-day rollover window requirement for those taxpayers who meet one of eleven situations. The procedure is easy and it’s free. No IRS fees. The IRS introduced a self-certification process (subject to audit) in the Rev Proc that allows you to declare your eligibility for a late rollover waiver. The IRS even included a certification letter with the eleven allowed possible reasons listed under which the late rollover is allowed. If your situation falls within one of those eleven reasons, you just check the box corresponding to the reason. The Plan Administrator or IRA trustee can rely on the self-certification, unless they have actual knowledge that is contrary to the self-certification.
read more...THE $10,000 PROBLEM
Under 26 USC §402(c)(3) and §408(d)(3) taxpayers have 60 days to rollover their tax-deferred retirement accounts to a new qualified retirement account. After 60 days, the money from the retirement account is considered to have been distributed to the taxpayer as income and they owe tax on the entire account balance plus penalties. Until February 1 of this year, when taxpayers missed the 60-day window rollover, they could apply for an IRS Private Letter Ruling (PLR) to waive the 60-day requirement. The cost to request a PLR depended on the balance of the retirement of the account and the cost was from $500 – $3,000. However, on February 1, 2016 the cost of a PLR soared to $10,000 for all 60-day waiver requests under Rev Proc 2016-8 user fee schedule changes, halting the use of the PLR process to obtain a waiver for most taxpayers.
WHY ARE RETIRMENT ACCOUNTS BEING ROLLED OVER?
You may be wondering why rolling over retirement accounts is a big problem. However, a quick review of the IRS PLR decisions shows that a fair number are related to individuals moving their retirement accounts for many reasons, such as changing jobs, putting accounts together or separating them, moving 401(K)s to IRAs, changing financial advisors, or wanting different investment options. Each year, many deferred retirement account rollovers fail to meet the IRS 60-day maximum rollover time requirement, leaving the account owner liable for tax on the total retirement account balance unless the IRS waives the 60-day requirement.
Recently, one of our clients faced the $10,000 problem when he changed jobs and his 401(k) rollover was erroneously put into a non-IRA account. The taxpayer did not withdraw or add to the account and, for all practical purposes, treated the account as if it were an IRA account. Because the account had been active for more than one year and the bank would not admit fault, the taxpayer’s only choices were to apply for a private letter ruling at the cost of $10,000, wait to see if the Statute of Limitations would run, if the IRS would audit (of course leading to a tax court case to request the waiver because audit did not have the power to waive the 60-day rollover prior to this Rev Proc), or amend his tax return and declare the 401(k) account as income. In his case, the account that was transferred was worth less than $70,000. He felt it was too big of price to pay the $10,000 for a chance that the IRS would waive the 60-day requirement.
Another client wanted to move the retirement funds to a self-directed IRA account, feeling this would give him more choices and control over his retirement account. The client missed the 60-day deadline to set up the new IRA account and get the funds in the account. In this case, he misplaced the check and had not cashed it. Prior to the new Rev Proc 2016-47, if the taxpayer did not get permission to waive the 60-day rollover, he would have owed tax on the entire retirement account balance plus, if he has not yet reached 59 and ½ or meet one of the exceptions in IRC §72(t), he would owe a 10% excise tax. Many taxpayers have found themselves owing a tax liability exceeding six figures.
Regular readers of Tax Notes or other sources that provide information on PLR requests issued by the IRS can find the listing of rulings each week. Perusing this list of rulings provides many stories of how taxpayers, their financial advisors, their financial institutions, and others manage not to manage their IRA rollover responsibilities. No doubt Congressional offices were motivated to create the grant of authority to the IRS to provide relief here because of the host of sad stories provided by the regularly occurring failure to timely roll over the money into another qualifying account.
THE ELEVEN REASONS ALLOWED TO SELF-CERTIFY
To qualify for the self-certification process waiving the 60-day rollover requirement, the failed rollover must be for one of the following eleven reasons:
1.) An error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates.
2.) The distribution, having been made in the form of a check, was misplaced and never cashed.
3.) The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan.
4.) The taxpayer’s principal residence was severely damaged.
5.) A member of the taxpayer’s family died.
6.) The taxpayer or a member of the taxpayer’s family was seriously ill.
7.) The taxpayer was incarcerated.
8.) Restrictions were imposed by a foreign country.
9.) A postal error occurred.
10.) The distribution was made on account of a levy under §6331 and the proceeds of the levy have been returned to the taxpayer.
11.) The party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.
If the taxpayer’s situation meets one or more of the above reasons and the IRS has not previously denied the waiver, then the taxpayer can self-certify. The IRS will be notified of a late rollover. Under the Rev Proc, the IRA trustee is required to file form 5498 with the IRS and to check a new box on the form that states that the rollover contribution was accepted after the 60-day timeframe. The taxpayer can still be audited on the facts and circumstances of the failed 60-day rollover. The taxpayer is not in the clear until the statute of limitations on assessment expires. The Rev Proc does not provide any special overriding rules for the statute of limitations on assessment for the self-certification process. §6501(a) states that the commissioner generally must assess tax within three years after the return is filed and §6501(e)(1) allows an extension to six years if the taxpayer fails to report gross income in excess of 25% of the amount of gross income reported on the tax return. While there is no case law on this specific scenario using the self-certification, the Tax Court found these assessment periods applied in a decision on March 29, 2016, in James E. Thiessen and Judith T. Thiessen v Commissioner, U.S. Tax Court, Dkt. No. 11965-10. In that case, the taxpayers’ entire IRA was deemed to have been distributed because of a prohibited transaction. The Tax Court determined that the statute of limitations on assessing tax for the resulting involuntary distribution of their retirement account was 6 years, under §6501(e)(1), from the date when their tax return was due that the distribution should have been included in gross income.
Additionally, Rev Proc 2003-16 Section 3 is amended to allow a waiver to be granted during an exam for the 60-day rollover requirement.
Another nice feature of self-certification is that it allows the financial institution into which the funds are being rolled to accept the money without waiting for the IRS to issue a PLR. Taxpayers caught in this situation sometimes wanted to put money back into an IRA account but were prevented from doing so because the financial institution managing the account had concerns about the ability of the taxpayer to do this after the passage of the 60-day period. The financial institution now has something, the self-certification, on which it can hang its hat in accepting the contribution.
