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October 13, 2002 at 08:00 PM
Mistakes Proved Fatal To An IRA Owner’s Attempted Rollover
An IRA owners attempt to roll over a distribution from an investment in a certificate of deposit to an annuity was a failure, due to two critical mistakes, according to a recent Tax Court memorandum opinion.
The court explained away two other similar rulings in which taxpayers had been permitted to correct rollover mistakes and thus continue the tax deferral in their IRAs.
Richard Crow had an IRA at a local bank from 1976 to 1998. In August 1998, he met with a bank representative to discuss his future plans for the account. Subsequently he withdrew $39,295 from the account and closed it out, transferring the funds, along with some additional money, to a nonqualified annuity. In 1999, the bank sent Crow a Form 1099-R documenting the distribution as a taxable IRA withdrawal.
The receipt of a Form 1099 should have been an alert to Crow, as it suggests that a taxable transaction has taken place. The taxpayer (or the person who prepares his tax return) must follow up with the appropriate documentation to show why the distribution is not taxable. This should have led to the determination that the funds had been transferred in error to a taxable account, making it possible to correct the mistake.
Instead, Crow ignored the Form 1099 and did not claim the distribution as income on his 1998 return. Predictably, the IRS came knocking at his door about a year later, wanting to know why he had not included the distribution in his 1998 income. At that point, Crow contacted the bank.
In a curious sequence of events, the bank prepared a corrected Form 1099, listing the distribution as a rollover, and notified the IRS that the account “had been erroneously closed out as reg CD [sic] and should have been done as a trustee transfer.”
The bank even prepared a “Retirement Account Correction Worksheet” detailing what it called a recharacterization, and changed the distribution code on the Form 1099 to “Trustee Transfer.” However, the courts opinion indicates that the IRS had no record of receiving the updated form.
