Historically, taxpayers had to submit a private letter ruling request for a waiver, but today taxpayers can take the easier route of self-certification.
Hardship Waivers for 60-Day Rollover
The IRS may waive the 60-day rule for an individual if the individual could not meet the deadline due to “casualty, disaster, or other events beyond the reasonable control of the individual.” Waivers can be obtained:
- by successfully applying for a private letter ruling;
- by qualifying for an “automatic waiver” for certain financial institution mistakes; or
- by the IRS identifying a waiver situation during an examination.
An alternative is self-certification that the taxpayer is eligible for a waiver. A taxpayer is not guaranteed a waiver with self-certification, and the IRS can still impose tax and understatement penalties in examination. But everyone can treat the transaction as a rollover for now and get on with their business.
Private Letter Rulings
Although getting a private letter ruling is the gold standard for IRS waivers, they do have their drawbacks. These include:
- high application costs, including a $10,000 user fee and significant professional fees;
- lengthy waiting periods of up to 6 months or more during which time the taxpayer cannot safely proceed with the rollover; and
- after all that, the IRS could deny the waiver.
The IRS publishes redacted versions of its private letter rulings. That might be an additional reason to avoid that route.
Estates, however, continue to seek private letter rulings because they have the time, the stakes are high, and they want the closure a definitive answer will bring.
Automatic Waivers for Financial Institution Error
The IRS waives a failure to comply with the 60-day rule if:
- a financial institution received funds prior to the end of the 60-day period;
- the taxpayer correctly followed all IRA or retirement plan deposit procedures;
- the institution made an error and this error was the sole reason the funds were not deposited in time;
- the funds must be credited to the IRA within a one year period; and
- the transaction would have been a valid rollover if the financial institution had deposited the funds as instructed.
Automatic Wavers Mostly a Good Thing
The good thing about an automatic waiver is that the taxpayer does not have to bother with getting a private letter ruling. It also gives a financial institution permission to admit a mistake and take the owner’s money as intended.
The downside is that the financial institution might not cooperate in admitting a mistake or in treating the distribution as a rollover. In that case, private letter ruling might be necessary to provide assurance to that financial institution or a different one that the distribution should be treated as a rollover. The IRS will not make any institution accept a distribution as a rollover after 60-days.
There is also the risk the IRS can look at this in examination and decide the taxpayer does not qualify for the waiver. A statement from the financial institution that it is to blame would be helpful to keep in the taxpayer’s files.
When a Taxpayer can Self-Certify Waiver Eligibility
In 2016, the IRS adopted a new self-certification procedure. If a taxpayer self-certifies that one or more waiver criteria are met, the taxpayer may report the contribution as a valid rollover.
Taxpayers can self-certify if one or more of the following circumstances applies:
- an error committed by the financial institution receiving the contribution or making the distribution;
- the distribution check was misplaced and never cashed;
- the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;
- the taxpayer’s principal residence was severely damaged;
- a member of the taxpayer’s family died;
- the taxpayer or a member of the taxpayer’s family was seriously ill;
- the taxpayer was incarcerated;
- restrictions were imposed by a foreign country;
- a postal error occurred;
- the distribution was made on account of a levy and the proceeds of the levy have been returned to the taxpayer; or
- the party making the distribution delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.
The IRS has provided a sample self-certification letter that a taxpayer can use to notify the administrator or trustee of the retirement plan or IRA receiving the rollover that they qualify for the waiver. The taxpayer sends a letter to the financial institution checking a box to show why the taxpayer believes a waiver is appropriate. The taxpayer can report the transaction as a rollover.
Factors Relevant to a Waiver
The IRS has a long history of issuing private letter rulings on hardship waivers.
Private letter rulings do not bind the IRS as to how it would rule for other taxpayers. But reading them gives a strong sense of what factors that sway the IRS’s thinking.
Examples of Nonuse of Funds
It is important that during the period between the distribution and the desired rollover, the IRA owner parked the funds and did not use them for other purposes. Otherwise it will look like the owner is just trying to game the system. Consider the following examples where the IRS refused to issue a waiver.
Example. The IRA owner used the distribution to pay off an existing mortgage on investment property, and the delay in rolling over the distribution was due to delays in the sale of the property.
Example. The owner used the distribution for a short-term loan to his elderly mother to buy a new home until she could get a mortgage.
Example. The owner used the funds for personal expenses.
Example. A surviving spouse liquidated the decedent’s 403(b) account and placed the proceeds in his own account to allow the sick spouse to qualify for Medicaid who, it turned out, died before Medicaid could be obtained and while the distribution was still in the surviving spouse’s account.
Reasons not on the Self-Certification List
Note that the items on the self-certification list cover the common situations that earn a taxpayer a waiver in private letter ruling. But there are a few additional categories found in the rules.
A taxpayer who had separated from her spouse on whom had relied for all financial matters qualified for a waiver for the period of the separation.
The IRS waived the deadline for a taxpayer who received lump sum retirement plan distribution while out of the country and who did not return until after the 60-day period had expired.
The IRS allowed taxpayers to roll over litigation and arbitration awards that involved management of the taxpayer’s IRA. The IRS also waived the deadline where certain investments in the taxpayer’s IRA had been seized by government authorities in connection with the owner’s arrest, and then distributed after the court ordered release of the assets.
Financial Institution Errors
Not all financial institution errors qualify for automatic waivers. Consider the following examples where the IRS issued a waiver.
Example. A 401(k) participant separating from employment transferred a distribution to what she thought was an IRA set up for her online by her husband, but was in fact a non-IRA account because the system would not allow an IRA to be held jointly.
Example. An IRA owner rolled over a distribution into an IRA annuity, then changed his mind and cancelled the annuity, had to wait a significant time before the life insurance company officially cancelled it, and then tried to roll over to another IRA 10 days beyond the 60 day limit.
Example. The IRS granted relief The financial institution acknowledged in writing its own error in depositing rolled over funds into a non-IRA account;
Example. A Roth IRA owner opened a non-IRA account rather than a Roth IRA because a financial advisor representing the bank gave her the wrong paperwork;
Example. The financial institution acknowledged that its web site was potentially confusing where a plan participant tried to set up a rollover IRA, but accidentally opened a regular investment account.
Compliance Tip: It helps to get the financial institution to admit to the error, or at least acknowledge the potential for confusion. For example, the IRS declined to issue a waiver where the bank did not acknowledge it told the owner he had more than 60 days to roll over the distribution.
Failure to notify recipient of rollover right
Taxpayers can normally obtain a waiver where an employer plan distributes a lump sum to the participant or participant’s spouse, and fails to notify the recipient of the right to roll over the amount into an IRA to avoid tax. However, in the IRA-to-IRA rollover context, the IRS ruled against IRA owners who blamed their IRA institutions for failing to inform them of their rollover rights where the owners withdrew amounts in search of a better return on their investments.
Financial advisor error as reason to waive deadline
The IRS issued a waiver where a financial advisor transferred the taxpayer’s IRA rollover amounts directly into an investment fund rather than into the taxpayer’s self-directed IRA, which would then invest in the fund.
Funds not received by taxpayer
The IRS granted a waiver of the 60-day rollover period to a taxpayer who failed to pay the maintenance fee on his IRA (assuming that the bank would deduct the fee from his account) resulting in the bank closing his IRA account and sending him a Form 1099-R, indicating that the entire amount of his IRA had been distributed to him. The IRS agreed that there was no actual distribution of assets since the funds in the bank were never sent to the individual, and therefore allowed the taxpayer roll over the funds back into the original IRA.
Similarly, the IRS privately ruled that a waiver was unnecessary where the taxpayer did not receive the distribution check sent to him by his employer. The employer reissued a second check several months later which the taxpayer did receive, and the taxpayer then rolled over the amount to his IRA well within 60 days of receipt of the reissued check.
Serious illnesses and long-term cognitive impairments are often grounds for a waiver, as long as they are well documented. For example, the IRS waived the 60-day period where the owner was diagnosed with an extremely aggressive malignancy, the owner immediately began medical treatments, and documentation was provided to the IRS.
Compliance Tip: It is always important to provide documentation to the IRS to support the request for a letter ruling, including medical records or a doctor’s letter where appropriate. Note too that a spouse’s health problems can count if the IRA owner must care for the spouse.
Depression and Mental Impairments
Depression is a reason to waive the deadline. The IRS granted a waiver to a couple who were unable to make financial decisions due to their medical and mental states.
Similarly, an IRA owner who was on medication for dementia, and suffered minor strokes before the distribution obtained relief. He submitted dated progress notes by his doctor confirming his decline prior to the expiration of the rollover period.
Although advanced age in itself might help support an application for a waiver, the IRS does not go on record as handing out waivers simply for that reason. For example, IRS denied a waiver request where it took the view that an older taxpayer merely misunderstood the rollover rules.
Similarly, the IRS ruled against an owner who mistakenly thought his savings account was his retirement account.
Death in Family
If the IRS has a soft spot it is for surviving spouses, especially surviving spouses who did not handle financial affairs. Here are other some examples of where the IRS granted relief:
- death by murder of a family member shortly before the end of the 60 day period where the owner tried to rollover the distribution less than two weeks after the expiration of the 60-day period;
- owner’s brother died, the owner was executor of his brother’s estate, and he had to make funeral arrangements and arrange nursing home care for his brother’s wife;
- decedent’s daughter, who was acting under power of attorney and who later became executrix, tried to roll over a plan distribution but the recipient institution required clarification of the daughter’s authority and the decedent died before he could give it.
Self-Certification of Rollover: The Easier Route?
Taxpayers continue to seek letter rulings for hardship waivers for missing the 60-day rollover deadlines. However, if the facts are clear, self-certification is an easier process those taxpayers should consider.
By James Solheim, J.D.
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