IRS Issues Guidance For Rollover Deadline Waivers

By John H. Fenton

For years, countless taxpayers have been victimized by the strict 60-day deadline for rolling over distributions from retirement plans or individual retirement accounts. More than a year after being prodded by Congress, the IRS has finally issued guidelines for requesting waivers of the deadline.

Historically, the IRS maintained that the rollover deadline was absolute and could not be waived, even where fairness seemed to require a waiver. In response to the sometimes harsh results, the Economic Growth and Tax Relief Reconciliation Act of 2001 gave the IRS the ability to waive the 60-day rollover requirement “where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the [taxpayers] reasonable control.”

Under the new guidelines, a taxpayer may request a private letter ruling from the IRS waiving the deadline under some circumstances. The Service will consider “all relevant facts and circumstances,” such as whether financial institutions committed any errors; whether an incomplete rollover was due to death, disability, hospitalization, incarceration, or postal error; how an amount distributed was used by the taxpayer, including whether a check was cashed; and how much time elapsed since the distribution.

The new guidelines grant automatic waivers in cases where the failure to timely complete a rollover is “solely due to an error on the part of the financial institution.” The taxpayer must have followed the institutions required procedures within the 60-day rollover period, and the error must ultimately be corrected within one year of the distribution. In these circumstances, no waiver request is necessary.

The new waiver rules will protect many taxpayers from unfair results, but the rules are vague enough to leave a great deal of uncertainty. In a 1998 case, a taxpayer directed a financial institution to designate a trust as the IRAs new beneficiary and make all required minimum distributions to the trust. The taxpayer did not notice that the institution had him instead sign paperwork to distribute the entire IRA to a new non-IRA trust account. The IRS said it had no authority to waive the deadline anyway, but did place some of the blame on the taxpayer. Only time will tell how the IRS will apply the new standards to taxpayers partly to blame for their own misfortune.

In addition, no relief may be available in many cases involving fraud. In a 1999 case, an accountant persuaded clients, friends and relatives to “roll over” IRAs into new partnership or mutual fund investments. The accountant embezzled the money, leaving the victims with taxable IRA distributions, penalties for early withdrawals, and none of the money left with which to pay the taxes and penalties. The IRS refused even to waive the early withdrawal penalties. Under the new rules, it is still not clear that the IRS could grant any relief unless the victims could replace the money stolen with other funds and complete a rollover. (The guidance can be found in Rev. Proc. 2003-16, 2003-4 IRB 359.)

John H. Fenton, J.D., M.S.B.A., is a staff writer for Tax Facts, a National Underwriter Company publication.


Reproduced from National Underwriter Edition, February 17, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.