The IRS announced a new procedure on Aug. 24 that gives taxpayers a waiver for missing the 60-day time limit on retirement plan rollovers and helps them avoid early distribution penalty taxes.
Revenue Procedure 2016-47 includes a sample self-certification letter that a taxpayer can use to notify the administrator or trustee of the retirement plan or IRA who will receive the rollover that they qualify for the waiver.
The procedure modifies Revenue Procedure 2003-16, 2003-4 I.R.B. 359 by allowing the IRS to grant a waiver while examining a taxpayer’s income tax return.
Typically, a distribution from an IRA or employer retirement plan can only avoid taxes on the rollover if the contribution to another retirement plan is done by the 60th day after it was received. Generally, anyone who misses that deadline gets a waiver only by asking for a private letter ruling from the IRS.
The waiver applies only to first-time requests to the IRS. Repeaters won’t qualify.
A delinquent taxpayer who misses the 60-day deadline now can qualify for the waiver if at least one of 11 problems occurred:
A financial institution made an error.
A check for the distribution was misplaced and never cashed.
The taxpayer wrongly deposited the distribution in an account believed to be an eligible retirement plan.
The taxpayer’s home was damaged.
The taxpayer had a death in the family.
The taxpayer or a family member faced a serious illness.
The taxpayer was in prison.
A foreign country imposed restrictions.
The postal service screwed up.
The distribution was made because of a levy under Code Section 6331 (levy and distraint), the proceeds of which have been returned to the taxpayer.
Whoever made the distribution delayed giving information that the receiving plan or IRA needed to complete the rollover, even though the taxpayer made reasonable efforts to get the information.
Once the above problems no longer prevent the taxpayer from making the contribution, it must be made within 30 days.
There’s a catch, of course. During an audit, the IRS may consider if the contribution meets the waiver requirements. Things that could derail the waiver include a material misstatement in the self-certification, one of the 11 problems didn’t actually prevent the taxpayer from meeting the 60-day rollover deadline, or the taxpayer didn’t make the contribution soon enough after the problems no longer stalled the contribution.
That, in turn, could make the taxpayer subject to additions to income and penalties.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.