In a recent private letter ruling, the IRS waived the 60-day IRA rollover rule for a surviving spouse who claimed financial illiteracy and duress. However, the wording of Section 408 of the Internal Revenue Code is permissive rather than mandatory — even if the conditions outlined to receive an IRS waiver are met, the request can be denied.
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In Private Letter Ruling (PLR) 201149048 a taxpayer received an IRA distribution, which his spouse and financial advisor claim he intended to rollover to another IRA. Medical issues arose shortly after the IRA distribution, however, which impeded his ability to handle financial affairs and contributed to his death. His spouse also failed to complete the IRA rollover. She represented to the IRS that she was under duress due to the situation with her spouse and inexperienced with financial matters.
Internal Revenue Code Details Circumstances for IRS Waiver of 60-Day Rollover Rule
The IRS internal revenue code provides that a rollover must be accomplished within 60 days. However, the IRS may waive the 60-day rollover rule “where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.”
In determining whether to waive the 60-day rollover requirement, Revenue Procedure 2003-15 states that “the service will consider all relevant facts and circumstances, including:” (1) financial institution error; (2) “death, disability, hospitalization, incarceration, restrictions imposed by a foreign county, or postal error; (3) the use of the distribution; and, (4) the time since the distribution. (Source: Revenue Procedure 2003-15, 2003-4 I.R.B. 359; January 27, 2003).
In this private letter ruling, the IRS waived the 60-day rollover rule because the facts supported the position that the IRA rollover was not accomplished in a timely fashion due to “mental and medical conditions during the 60-day rollover period.”
This ruling seems relatively uneventful. However, consider the wording of IRS Internal Revenue Code Section 408(d)(3)(I): “The Secretary may waive 60-day requirement…” [Emphasis added]. The wording is permissive rather than mandatory — even if the conditions outlined to receive a waiver are met, the request can be denied. Everyone who owns and manages IRAs should know this IRS internal revenue tax code section. Rollovers should always be accomplished by moving the funds directly, or at minimum as quickly as possible, into the new IRA.
When and How to Request a Private Letter Ruling (PLR)
Generally, relief is requested through the private letter ruling (PLR) process. The requirements for filing PLR can be found under Revenue Procedures 2012-1 and 2012-8. However, no application to the IRS is required if a financial institution receives funds on behalf of a taxpayer prior to the expiration of the 60-day rollover period, the taxpayer follows all procedures required by the financial institution for depositing the funds into an eligible retirement plan within the 60-day period (including giving instructions to deposit the funds into an eligible retirement plan) and, solely due to an error on the part of the financial institution, the funds are not deposited into an eligible retirement plan within the 60-day rollover period. Automatic approval is granted only: (1) if the funds are deposited into an eligible retirement plan within one year from the beginning of the 60-day rollover period; and (2) if the financial institution had deposited the funds as instructed, it would have been a valid rollover.
The IRS has informally indicated that they will only grant relief if the taxpayer's fact pattern falls squarely under one of the examples listed in Revenue Procedure 2003-16 (i.e. errors committed by a financial institution, death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, or postal error). Advisors need to be aware of this when counseling clients regarding whether they should invest the money to submit a private letter ruling request. Obtaining such relief will help your client save on the payment of income tax and possibly the early distribution penalty that would otherwise be due on the failed rollover. Given such tax consequences, the costs involved in requesting a PLR is generally a good trade-off.
If you have a client who has already missed the 60-day rollover deadline, you should carefully review the facts surrounding the missed deadline to determine whether relief may be available.