In a much welcomed development, on August 24, 2016 the IRS released a self-certification procedure to provide relief for the tax payers who accidentally miss the 60-day window to roll over a retirement account distribution to another retirement account.
The Service outlined 11 check-box circumstances which qualify for this relief and which plan trustees, administrators, financial institutions, and the IRS may accept under the Revenue Procedure 2016-47 (Rev. Proc.). A model self-correction letter was provided as a part of the new procedure. Another new option – IRS now has the authority to grant a waiver during a subsequent audit – has also been added to the list of remedies. The self-certification procedure eliminates the need for a more expensive and time-consuming option of requesting a private letter ruling from the IRS for a wide array of reasons.
That said, if none of the circumstances outlined in the Rev. Proc. 2016-47 apply, the private letter ruling route is still available.
Background There are two primary ways participants can move their retirement account balances without creating adverse tax consequences, one via a direct trustee-to-trustee transfer, and the other via an indirect rollover. In case of a trustee-to-trustee transfer, the funds move directly from trustee of one retirement account to trustee of a recipient retirement account. In case of an indirect rollover, the funds are first received by the participant and then deposited to a new retirement account; so long as the money is in the new account by the 60-th day after it was in participant’s hands, it is a tax-free transaction.
The problem typically arises when the 60-day deposit deadline is missed: the entire amount is treated as income and taxed, including a 10% penalty when applicable. In the past, those who found themselves in such a predicament could petition the IRS for relief from the deadline requirement by requesting a private letter ruling (PLR). The PLR process is typically fairly expensive and the Service has not been known for favorable responses to many of the extension requests; that said when a financial institution’s error was the cause for a failure, an automatic approval would be granted.
What’s Changed The new Rev. Proc. outlined three conditions for a self-certification; they are:
1) The request is not made with respect to a transaction for which the IRS previously denied an extension request.
2) Contribution is made as soon as practicable after the mitigating circumstance no longer prevents it; a 30-day safe harbor is given for deposits made within 30 days.
3) The mitigating circumstance falls into one of the eleven categories;
- Financial institution’s error
- Misplaced uncashed check
- Deposit made into an account believed by participant to be eligible retirement account
- Severe damage to principal residence
- Death in the family
- Illness or an ill family member
- Restrictions imposed by a foreign country
- Postal error
- Distribution made on account of IRS levy, and the amount is later returned
- Delay caused by distributing entity’s failure to provide timely information to receiving entity
If one or more of the eleven events apply and the other two conditions are satisfied, the tax payer can submit a self-certification letter to retirement plan administrator, plan or IRA trustee to notify them of their qualification for the exception to the 60-day rule. A model letter is provided in the Revenue Procedure; it can be used word-for-word or be modified so long as it offers materially the same information.
In turn, the plan administrator or trustee of an IRA may rely on this self-certification for purposes of accepting and reporting this contribution. This self-certification, however, may not be used when the administrator and trustee have knowledge contrary to the facts in the self-certification or for any other purposes.
Participant then may report the rollover as timely made on his or her tax return. If later, on audit, the IRS determines that the conditions for the waiver had not been met, the Service may levy back taxes and additional penalties on the failed rollover.
Another Waiver In addition to the automatic waiver, the IRS was empowered to grant a waiver during an audit if it finds that the tax payer is eligible for such relief.
Effective Date The new rule took effect on August 24, 2016. As the case before issuance of Rev. Proc. 2016-47, a path of requesting an IRS private letter ruling remains open for those who do not satisfy the new procedure’s requirements.
While the new revenue ruling streamlines the request for a waiver for inadvertent mistakes in case of indirect rollovers, a trustee-to-trustee transfer remains a path the IRS encourages for transfer of funds between retirement accounts.
Tax laws are complex and subject to change. This material is provided for information purposes only. Individuals are urged to consult a properly licensed tax or legal advisor to understand the tax and related consequences of any actions they may choose to undertake as relates to their retirement accounts and investments.