retirement planning

IRS Shows Mercy on IRA Rollover Waiver

Nov 2nd 2017
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If you fail to complete an IRA rollover in a timely fashion, the tax penalties can be severe, especially if you’re nowhere near retirement. But if there’s a good reason for the foul-up the IRS may be willing to listen. Case in point: In a new ruling, the IRS granted a divorcing taxpayer a waiver when her husband failed to fulfill a legal obligation (PLR 201742034, 10/20/17).

As a general rule, you can roll over funds from a qualified plan like a 401(k) or Simplified Employee Pension (SEP) to an IRA, or from one IRA to another, without any tax liability as long as the rollover is completed within 60 days.

However, if the 60-day deadline isn’t met, the transfer is treated as a fully taxable distribution. Furthermore, for a payout made prior to reaching 59 1/2 years of age, you owe a 10 percent tax penalty — on top of the regular income tax — absent a special tax law exception.

But you can still appeal to the IRS for forgiveness. Specifically, the agency may waive the 60-day rule if an individual suffers a casualty, disaster or other event beyond his reasonable control and not waiving the requirement would be against equity or good conscience.

The taxpayer in the new ruling had filed for divorce. Her husband informed her that he would be closing the medical practice he owned, a clear violation of an injunction issued during the divorce proceedings.

During this time, the husband continued to reside in their home, but he assured the taxpayer that he would give her the funds to buy her own place. Based on this assertion and his legal obligations under state law, the taxpayer withdrew funds from her IRA in order to purchase a residence. However, the husband failed to provide any funds in connection with the divorce mediation.

After 60 days had passed, a district court judge ordered the transfer of funds from the husband’s SEP-IRA to a SEP-IRA owned by the taxpayer. The court order also stated that the taxpayer should not be liable for any tax with respect to this transfer. Subsequently, funds were transferred to the taxpayer’s SEP-IRA.

The taxpayer now concedes that she received a distribution from her IRA. But she argues that she didn’t complete the rollover within the 60-day period due to her husband’s

failure to fulfill legal requirements under the state law during divorce proceedings. And now the IRS agrees.  Accordingly, it has provided a waiver for the taxpayer and she is exempted from tax and the 10 percent penalty.

If one of your clients is stuck in a similar situation, or has a legitimate reason for failing to complete a timely rollover, don’t give up the ship without a fight. The IRS has shown it can be lenient when it comes to imposing these strict rules.

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