Self-Certification Spells Relief for Late IRA Rollovers

By H. Kimberly Zydel, CPA, MST, DZH Phillips, San Francisco

Editor: Michael D. Koppel, CPA/CITP/PFS, MSA, MBA

Individual taxpayers are allowed to withdraw funds from an IRA without any income tax consequence, provided the funds are redeposited to the IRA (or another taxpayer-owned eligible IRA or retirement plan) within 60 days. This taxpayer-friendly provision provides taxpayers with tax-free access (i.e., a short-term loan) to retirement funds. A tax-free rollover is allowed just once in a 12-month period. With the exception of minimum required distributions, most distributions are eligible to be rolled over.

More often than one might expect, taxpayers fail to meet the 60-day rollover requirement. Sometimes, the fault lies with the taxpayer; other times, the error is out of the taxpayer's control. While the 60-day period cannot be extended, the IRS is authorized under Sec. 402(c)(3)(B) to waive it "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." Further relief is available in Rev. Proc. 2003-16, which states the IRS will grant automatic waivers of the 60-day period when the failure of the timely rollover is attributable to a financial institution error. For errors due to hardship, a taxpayer's only option was to file a private letter ruling requesting relief—until now, that is.

With the issuance of Rev. Proc. 2016-47, the IRS provided a self-certification procedure that allows taxpayers who fail to meet the 60-day rollover requirement to claim eligibility for a waiver. Plan administrators, IRA trustees, custodians, or issuers can rely on this written self-certification to accept and record receipt of a rollover contribution outside of the 60-day period. A taxpayer must meet the following conditions to use the self-certification procedure:

  1. No prior denial by the IRS. The IRS must not have previously denied a waiver request with respect to a rollover of all or part of the distribution to which the contribution relates.
  2. Reason for missing 60-day deadline. The taxpayer must have missed the 60-day deadline because of the taxpayer's inability to complete a rollover due to one or more of the following reasons:
    1. an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;
    2. the distribution, having been made in the form of a check, was misplaced and never cashed;
    3. the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;
    4. the taxpayer's principal residence was severely damaged;
    5. a member of the taxpayer's family died;
    6. the taxpayer or a member of the taxpayer's family was seriously ill;
    7. the taxpayer was incarcerated;
    8. restrictions were imposed by a foreign country;
    9. a postal error occurred;
    10. the distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer; or
    11. the party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer's reasonable efforts to obtain the information.
  3. Contribution as soon as practicable; 30-day safe harbor. The contribution must be made to the plan or IRA as soon as practicable after the reason or reasons listed in the preceding paragraph no longer prevent the taxpayer from making the contribution. This requirement is deemed to be satisfied if the contribution is made within 30 days after the reason or reasons no longer prevent the taxpayer from making the contribution. [Rev. Proc. 2016-47, §3.02]

The new procedure, which went into effect Aug. 24, 2016, provides a model letter for claiming relief.

The IRS cautions that, although a self-certification allows a taxpayer to report the contribution as a valid rollover, self-certification is not a waiver of the 60-day rollover requirement. Thus, if the IRS subsequently determines on audit that the waiver requirements were not actually met, additional taxes and penalties may apply, such as the Sec. 6651 penalty for failure to pay the proper amount of tax. A plan administrator or IRA trustee, for purposes of accepting and reporting a rollover contribution, may rely on the self-certification submitted by a taxpayer in determining that the conditions for a waiver have been satisfied, provided he or she has no knowledge to the contrary.

In addition, the revenue procedure provides that even if the taxpayer does not file a self-certification, the IRS now has the authority to grant a waiver during a subsequent examination. It further states that Form 5498, IRA Contribution Information, instructions will be modified to require that a plan administrator or IRA trustee that accepts a rollover contribution after the 60-day deadline report that the contribution was accepted after the deadline.

While a direct trustee-to-trustee transfer can prevent potential delays and problems sometimes associated with effecting a timely rollover, it is not always desirable. The new self-certification procedures provided in Rev. Proc. 2016-47 make it much simpler in many cases for a taxpayer to obtain relief if he or she fails to roll over funds distributed from an IRA by the 60-day deadline.

From

EditorNotes

Michael Koppel is a retired partner with Gray, Gray & Gray LLP in Canton, Mass.

For additional information about these items, contact Mr. Koppel at 781-407-0300 or mkoppel@gggcpas.com.

Unless otherwise noted, contributors are members of or associated with CPAmerica International.

Newsletter Articles

SPONSORED REPORT

Year-End Tax Planning and What’s New for 2016

A look at year-end tax planning strategies for individuals and businesses, as well as recent federal tax law changes affecting this year’s tax returns.

PRACTICE MANAGEMENT

CPAs Contend With Tax ID Theft

Tax-related identity theft fraud remains a widespread problem that is often difficult for victims and their tax preparers to correct.