And economist Martin A. Sullivan points out that, “There may be liberty and justice for all, but there are tax breaks only for some." Rarely for the middle class taxpayers who need it most!
That said, on to more “stuff” from the Monday’s Year-End Tax Update Seminar -
In order to avoid the 10% penalty on a premature withdrawal from an IRA or pension plan, the distribution must be "rolled over" to an IRA or other qualified plan within 60 days. Often a taxpayer will use this 60-day rule to take a short-term loan from an IRA or pension account.
Originally this rule could only be waived if the taxpayer was performing military service or was affected by a Presidential-declared disaster or a terrorist or military action. However, the Economic Growth and Tax Relief Reconciliation Act of 2001 gave the IRS the authority to waive the 60-day rule when failure to do so would be "against equity or good conscience".
IRS Rev. Proc. 2003-16 states that the 60-day rule may be waived in hardship cases and when the taxpayer has made a good faith effort to comply with the rule but did not do so through no fault of his/her own.
A waiver will be automatically granted if the taxpayer instructed a financial institution to deposit the rollover into a qualifying plan but the institution failed to do so. The financial institution must have received the funds within the 60-day period and the taxpayer must have followed all the procedures required by the financial institution for an IRA rollover. The financial institution’s FU must be fixed, and the money deposited into a qualified IRA account, within one year from the beginning of the original 60-day period.
To get the 60-day rule waived in any other situation (casualty, death, disability, disaster, hospitalization, incarceration, postal error, restrictions imposed by a foreign country, etc) a taxpayer must request a "private letter ruling" (PLR). There is a substantial fee for requesting a PLR to waive the 60-day rule.
The book for the NATP “Famous 1040 Workshop” I attended on Monday provided a chart of how the IRS has ruled on this issue in recent PLRs.
A waiver was granted when a taxpayer’s mother, and another’s mother-in-law, died during the 60-day period, when mental and physical illness impaired taxpayers’ ability to handle his/her financial affairs, and in the case of a hurricane.
Waivers have also been granted when taxpayers were not given correct or timely advice on the subject by a qualified professional financial advisor on whom the taxpayers had relied. So you are not stuck if your broker or banker, who wrongly think they know all about taxes, FU-ed. A waiver was not granted when the bad advice came from a friend or relative. In one situation a friend told a taxpayer that he could take totally tax-free distributions from his traditional IRA once he turned age 59½. So don’t rely on tax advice from your neighbor or drinking buddy or Uncle Ira!
The current issue of NATP’s TAXPRO MONTHLY reports in detail on a recent PLR (200736036) for which the 60-day waiver was denied.
Here’s the story:
A taxpayer changed jobs and wanted to rollover the funds from his former employer’s 401(k) into an IRA. He went online to the website of a financial institution and opened what he thought was an IRA account. The paperwork he submitted to the 401(k) plan indicated that he would be depositing the money into an IRA account at the financial institution. The plan sent the taxpayer a check payable to the financial institution, which he mailed to the institution with an IRA deposit slip indicating the number of the account he had opened online. The assumed rollover was made well within the 60-day period.
The taxpayer was surprised to receive a Form 1099-INT for the account the following January. This was his first indication that the account he had opened online was not an IRA account. He requested a PLR to waive the 60-day rollover period so he could correct the error. In submitting the facts of the case to the IRS the taxpayer indicated that the financial institution claimed it never received the IRA deposit slip.
While this does involve a bank FU, it is more of a misunderstanding or miscommunication between the taxpayer and the financial institution. A waiver was granted by the IRS in several previous PLRs involving miscommunication.
Unfortunately in this situation the IRS took a hard line and denied the waiver, claiming that the taxpayer was solely responsible for the FU.
I suppose that the taxpayer could have been able to tell from the online confirmation for the opening of the account that it was not an IRA. An IRA account would have “IRA” in the title in some way.
The moral of the story is that with something as important as the rollover of substantial 401(k) funds you should not use the internet, but deal face to face, or at least by telephone, with a real person from the financial institution so you can make it clear that you want an IRA account. The NATP article advises to let the financial institution set up and facilitate the rollover. Then, “if a mistake occurs, it is likely that relief will be granted because of the financial institution being responsible instead of the taxpayer himself.”