The 60-day rollover rule: Self-certifying waiver eligibility

EXECUTIVE SUMMARY

Rev. Proc. 2016-47 provides 11 permissible reasons for which taxpayers may self-certify eligibility for a waiver of the 60-day time limit for an IRA or qualified plan rollover contribution. Self-certification is not an IRS waiver of the 60-day requirement and is subject to reporting by the receiving account or plan trustee and possible IRS verification. Rev. Proc. 2016-47 also allows the IRS to grant a waiver of the 60-day requirement in the course of an examination, a power it did not previously assert. The IRS has not elaborated on the meaning and scope of the 11 permissible reasons for self-certification. However, the permissible reasons for self-certification are much narrower in number and scope than the reasons for which the IRS has granted waivers in prior letter rulings. As can be seen from prior letter rulings, the IRS in general takes the position that if a taxpayer uses distributed funds for any personal reasons during the 60-day rollover period, the taxpayer is not entitled to a waiver if he or she does not meet the 60-day requirement. However, the IRS has been inconsistent in how it applies this general rule. A recent Tax Court case sheds light on the scope and availability of judicial reviews of IRS refusals to waive the 60-day rollover requirement.

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In the past, most individual retirement account (IRA) and retirement plan trustees have refused to accept rollover contributions of distributed funds that have been held by a taxpayer for more than 60 days, regardless of the circumstances.¹ The trustees often advise the taxpayer to obtain a private letter ruling that waives the 60-day requirement. The IRS may, of course, waive the 60-day requirement if failure to do so “would be against equity or good conscience.”² Now, however, the IRS has provided a certification alternative to a letter ruling that, while not itself an IRS waiver of the 60-day requirement, allows a taxpayer to avoid the time and expense of obtaining a ruling while still reassuring skeptical trustees.

Upon receiving a proper written certification from a taxpayer, an IRA or plan trustee may now accept a rollover contribution even though the taxpayer has violated the 60-day requirement. That is, the trustee may honor the taxpayer’s self-certification that he or she has permissible reasons for failing to satisfy the 60-day rollover requirement (unless the IRA trustee or plan administrator otherwise knows the rollover is not valid).³ The permissible reasons for self-certification may be any one or more of the following:

1. An error by the distributing or recipient financial institution;

2. A misplaced distribution check that was never cashed;

3. A distribution deposited and remaining in an account that the taxpayer mistakenly thought was an eligible retirement plan;

4. Severe damage to the taxpayer’s principal residence;

5. Death of a member of the taxpayer’s family;

6. Serious illness of the taxpayer or a member of the taxpayer’s family;

7. Incarceration of the taxpayer;

8. Restrictions imposed by a foreign country;

9. A postal error;

10. A delay in obtaining information from the distributing plan or IRA that was required by the recipient plan or IRA, despite the taxpayer’s reasonable efforts to obtain it; or

11. A return to the taxpayer of the proceeds of a federal tax levy on a plan or IRA.

To maintain the validity of a self-certification, taxpayers must make their rollover contribution to an IRA or plan as soon as practicable after the reasons for the delay no longer exist. However, a contribution within 30 days thereafter will automatically satisfy this requirement.⁴

Note that a self-certification is not an IRS waiver of the 60-day rollover requirement. However, a certifying taxpayer may still report the contribution as a valid rollover until informed otherwise by the IRS. Not surprisingly, though, a certification is invalid if the IRS previously denied a waiver request with respect to a rollover of all or part of the distribution.⁵

Waiver approved or denied in the course of an IRS examination

An IRA trustee must report self-certifications to the IRS, thus increasing the likelihood of an examination. The IRS, in an examination, will consider whether a taxpayer’s rollover satisfies the requirements for a waiver. For example, the IRS may determine that a waiver is not available because of a material misstatement in the self-certification. Or the IRS may find that the reasons claimed for missing the deadline did not prevent timely completion of the rollover. Or the IRS may find that the taxpayer failed to make the contribution as soon as practicable after the reasons for delay no longer existed.⁶

In addition to reviewing self-certifications, the IRS may on examination review the factual basis for an automatic waiver⁷ or the factual basis for a previous private letter ruling granting a waiver. In addition, the IRS has now confirmed that an agent may grant a waiver in the course of an examination, even in the absence of a self-certification or favorable ruling.⁸ Nevertheless, a previous self-certification would be more likely to induce an IRS agent to provide a waiver, and a favorable private letter ruling should give a taxpayer some welcome assurance even before a transaction is consummated.

If, on examination, the IRS does not allow a waiver for violation of the 60-day rule, the distribution will be included in the taxpayer’s income and the potentially applicable penalties could include the penalty for failure to pay tax and the accuracy-related or fraud penalties.⁹ To the extent applicable, the IRS would also assert the penalty for excess contributions (for contributions made to the recipient IRA or qualified plan).¹⁰

Permissible reasons for self-certification in light of prior rulings

Although the IRS has listed the permissible reasons for self-certification, the Service has not further elaborated on their meaning and scope. It is clear, however, that the permissible reasons are much more limited in number and scope than the many reasons the IRS found acceptable in prior favorable private letter rulings. Nevertheless, some of those prior rulings can be helpful in analyzing the permissible reasons for self-certification,¹¹ as the following discussion of each permissible reason demonstrates.

An error by the distributing or recipient financial institution

Favorable IRS rulings involving financial institution errors are plentiful. In most of those rulings, a taxpayer directs an employee of a financial institution to establish a rollover IRA, but the employee instead deposits the taxpayer’s funds into a non-IRA account.¹² For example, the IRS granted relief when a financial adviser prepared confusing rollover documents, and the recipient financial institution initially put the rollover funds into an IRA account but later erroneously transferred them to a non-IRA account.¹³

The IRS granted relief when an IRA rollover failed because a financial institution erroneously deposited the rollover funds into an inherited IRA account instead of a regular IRA account.¹⁴ Another waivable error occurred when a taxpayer instructed a financial institution employee to reinvest funds into a type of IRA investment the financial institution did not ordinarily accommodate (U.S. savings bonds), and the employee erroneously treated the request as a termination of the IRA.¹⁵ The IRS also granted a waiver when a financial institution closed a taxpayer’s IRA for nonpayment of fees but did not inform the taxpayer until after the 60-day period had expired.¹⁶

Various other financial institution errors have also led the IRS to grant waivers.¹⁷ However, it was not entirely clear in some of these favorable rulings that the error was entirely that of the financial institution. A close reading of the rulings indicates that some errors may have been due, at least in part, to negligence of the taxpayer.¹⁸ Fortunately, though, if such errors are not considered financial institution errors, many of them may still be errors subject to self-certification as erroneous deposits by taxpayers to non-IRA accounts (permissible reason No. 3 above).

The IRS will generally issue a favorable ruling when a financial institution provides erroneous advice regarding a rollover.For example, the IRS granted a waiver where the plan custodian erroneously informed the taxpayer that her investment in the plan exceeded the amount of her total distribution.¹⁹ Similarly, the Service waived violations where a bank employee erroneously said that a taxpayer could not roll over an IRA distribution because the taxpayer was over age 59½²⁰ and where a bank employee erroneously stated that a taxpayer would be taxed 10% if he completed a rollover.²¹

In fact, in one ruling, a distributing financial institution’s mere failure to inform a surviving spouse that the distributing account was an IRA constituted sufficient reason for a waiver.²² It does not matter that the misinformed person is handling the affairs of another taxpayer, e.g., a son or daughter acting for a parent with dementia or Alzheimer’s.²³

The IRS has allowed taxpayers to correct intended trustee-to-trustee rollovers (i.e., direct transfers) where a financial institution paid out all or part of the funds to the wrong party and the 60-day rollover period expired. For example, taxpayers received favorable rulings where a financial institution erroneously withheld income tax from a direct transfer and paid it over to the IRS.²⁴ The IRS has even given a 60-day waiver to the personal representative of a deceased taxpayer who had attempted the failed direct transfer.²⁵

In some favorable rulings, a third party (e.g., a broker,²⁶ financial adviser,²⁷ or former spouse²⁸ acting on the taxpayer’s behalf) failed to direct the financial institution to establish an IRA. The IRS nevertheless provided relief as if it were a financial institution error. In similar fashion, the IRS granted relief where a taxpayer missed the 60-day deadline because a third-party financial institution erroneously declined to wire the taxpayer’s funds to the IRA trustee.²⁹ However, taxpayers probably cannot self-certify these types of errors since they were not committed by either the distributing or recipient financial institutions (although deposits into non-IRA accounts might arguably qualify as taxpayer errors under permissible reason No. 3 above).

The IRS has generally held that it is not financial institution error if a financial institution declines to explain the tax consequences of an IRA distribution.In one ruling, a distribution was prompted by the statement of the taxpayer’s financial institution (the IRA trustee) that the taxpayer might obtain a better return by reinvesting the funds. In denying a waiver for the taxpayer’s failure to roll over the distributed funds, the IRS said the financial institution had no obligation to spell out the tax consequences of the distribution, and, in this case, the institution represented in writing that it was not undertaking any such obligation.³⁰ The IRS has stated even more succinctly that “the Code imposes no obligation on financial institutions to ensure that a taxpayer properly rolls over distributions to another entity.”³¹

Note that taxpayers have long been able to enjoy an automatic waiver of the 60-day requirement (without self-certifying or obtaining an IRS ruling) if the failure to satisfy the requirement for an otherwise valid rollover was due solely to an error of a financial institution. However, there are conditions. Within the 60-day period, the taxpayer must have transferred the funds to the financial institution, instructed it to deposit the funds into an IRA or eligible plan, and satisfied the financial institution’s procedural requirements. In addition, the financial institution must actually deposit the funds into the IRA or plan within one year from the date of the original IRA or plan distribution.³² If such a rollover qualifies for automatic waiver, the financial institution involved will generally be aware of the facts and the appropriateness of the waiver and thus probably will not require taxpayer self-certification.

A misplaced distribution check that was never cashed

Unfortunately, it is unclear why the IRS requires that an uncashed check be “misplaced” to qualify for self-certification, and it is unclear how broadly the IRS will define the word. In its rulings, the IRS has generally waived the 60-day requirement when a taxpayer simply retained an uncashed check without misplacing it.

For example, the IRS issued favorable rulings to taxpayers who failed to cash an unrequested distribution check,³³ stored uncashed checks in a safe deposit box under the erroneous belief there was no time limit for a rollover,³⁴ or filed a waiver request under the mistaken belief the 60-day period had expired (though the taxpayer still held the uncashed distribution check).³⁵ Unfortunately, though, it is very difficult to argue for self-certification purposes that an uncashed check is “misplaced” if the taxpayer knows where it is.

An account the taxpayer mistakenly thought was an eligible retirement plan

The IRS has frequently granted relief for distributions deposited in accounts that taxpayers mistakenly thought were eligible retirement plans. For example, the IRS granted relief when taxpayers mistakenly made online reinvestments of IRA funds into non-IRA accounts because of confusing websites.³⁶ Other rulings have provided waivers for errors for which the taxpayer and the financial institution may have been jointly responsible. For example, the IRS provided waivers for a taxpayer’s:

• Failure to communicate clearly an intent to establish an IRA;³⁷
• Mistaken assumption that the financial institution understood the taxpayer’s intent;³⁸
• Failure to notice he was filling out the wrong forms;³⁹ or
• Failure to notice that he received non-IRA documentation for the transaction.⁴⁰

However, the IRS will not automatically accept a taxpayer’s claim that a reinvestment of a distribution in a non-IRA account was a mistake. For example, the IRS denied a waiver to a taxpayer who claimed he mistakenly deposited distributed funds into a non-IRA account because of the trustee’s confusing website. The IRS concluded to the contrary, that, in this case, the non-IRA deposit was intended.⁴¹

It is important to note that self-certification for an erroneous deposit in a non-IRA account is available only if the distribution remains in the account until the self-certification is executed. In other contexts, though, the IRS has issued favorable rulings for deposits mistakenly made to non-IRA accounts, even though the amounts were subsequently transferred to other accounts prior to the issuance of a waiver.⁴² Presumably, the IRS’s prohibition of subsequent transfers for self-certification purposes is an effort to keep the process simple for administrative purposes.

Severe damage to the taxpayer’s principal residence

The Code specifically identifies casualty and disaster as events justifying the issuance of a waiver of the 60-day rule.⁴³ Thus, the IRS granted a waiver where a taxpayer unexpectedly received a rollover check during the aftermath of a hurricane when she was actively involved in official hurricane cleanup work.⁴⁴ Similarly, a taxpayer received a waiver where a blizzard paralyzed her home area and made it impractical and unsafe to travel to her bank on the last day of the 60-day rollover period.⁴⁵ In light of these rulings and the statute itself, it is difficult to understand why the IRS has limited casualty and disaster self-certifications to damage to a taxpayer’s residence.

Death of a member of the taxpayer’s family

The death of a family member has been a sufficient reason to issue waivers in private letter rulings. The IRS has also issued many favorable rulings to taxpayers caring for a terminally ill spouse or other relative. Strangely, the IRS has not explicitly stated that the death of the IRA owner is a reason for self-certification, even though it has routinely provided favorable rulings in such cases.⁴⁶ However, it seems likely that the self-certifying “taxpayer” after the death of an IRA owner would generally be an IRA beneficiary whose “family” includes the deceased owner.

Serious illness of the taxpayer or a member of the taxpayer’s family

The IRS has normally provided a waiver when the taxpayer is afflicted with a serious illness, for example, leukemia,⁴⁷ stroke,⁴⁸ cancer,⁴⁹ Parkinson’s,⁵⁰ heart surgery,⁵¹ surgery restricting the ability to drive and travel,⁵² mental illness,⁵³ etc.

Illnesses have also warranted a favorable ruling if coupled with extenuating circumstances. For example, the IRS waived the 60-day rollover period for a “medical condition,” for “health problems,” and for “mental impairment” where the taxpayer was elderly or hospitalized.⁵⁴ The IRS even granted a waiver to a taxpayer suffering “severe emotional distress” due to an unexpected forced retirement.⁵⁵ Arguably, the extenuating circumstances would also make these illnesses “serious” for self-certification purposes.

In another interesting ruling, the IRS granted relief to a taxpayer who suffered from a mental condition that impaired his ability to make sound financial decisions or understand the consequences of his actions.⁵⁶ In a similar ruling, the IRS granted relief where a taxpayer suffered from physical and mental conditions that impaired his ability to manage his financial affairs.⁵⁷ Likewise, the Service granted relief for an elderly taxpayer suffering from emotional distress, depression, and insomnia due to separation from his spouse and contentious divorce proceedings.⁵⁸

Serious illness of a family member has also usually been sufficient reason to issue a waiver. For example, the IRS issued favorable rulings to taxpayers caring for a terminally ill spouse or mother,⁵⁹ dealing with heart surgery for a spouse,⁶⁰ or caring for a spouse with leukemia and a daughter experiencing a complicated pregnancy.⁶¹ The IRS also granted a waiver for a taxpayer whose mentally unstable spouse procured an IRA distribution by forging the taxpayer’s signature.⁶²

However, the IRS declined to provide a waiver to a taxpayer whose fiancée was seriously ill.⁶³ Nor would a fiancée qualify as a member of the taxpayer’s family for self-certification purposes.

Incarceration of the taxpayer

It appears the IRS has had little occasion in the past to rule on waivers for a taxpayer’s incarceration. However, the IRS did provide a waiver to a taxpayer whose IRA funds were seized in connection with his arrest and incarceration but returned to him after his release more than 60 days later.⁶⁴

The dictionary definition of “incarceration” includes any kind of confinement. Thus, the IRS has provided a waiver to a mentally ill taxpayer who happened to be confined to a mental health facility when the 60-day rollover period expired.⁶⁵ Similarly, it has also done so for a mentally ill taxpayer who was imprisoned for criminal activity during and after the rollover period.⁶⁶ The IRS also extended a waiver to a taxpayer who was sporadically confined to a mental medical facility and a psychiatric ward for clinical depression, suicide watch, and self-mutilation.⁶⁷ Note that taxpayers confined for mental illness would also appear to qualify for self-certification as seriously ill taxpayers.

Restrictions imposed by a foreign country

This permissible reason for self-certification appears to involve rollover problems associated with currency restrictions and restrictions on the movement of funds out of a foreign country. Rulings involving this problem seem to be relatively rare. However, in one ruling, the IRS held that a waiver of the 60-day rule was warranted because of “banking restrictions” imposed by a foreign country.⁶⁸

A postal error

In the past, the IRS has issued favorable rulings for postal errors relating to the mailing of a distribution check from a plan or IRA, or the mailing of a rollover contribution to a plan or IRA. For example, the IRS granted waivers when a mailed IRA contribution was delayed because a severe winter storm shut down a postal processing center;⁶⁹ the post office returned the taxpayer’s contribution check undelivered without explanation;⁷⁰ access to a distribution check was delayed because the post office failed to honor a change-of-address request;⁷¹ and a contribution check was delivered late, even though sent by priority certified mail four days before expiration of the 60-day period.⁷²

The IRS has also waived the 60-day rollover period where a trustee or custodian mailed a distribution check to taxpayers who did not receive it because it was lost in the mail.⁷³ In fact, in such cases, the IRS has concluded in some rulings that the 60-day period does not even begin to run until the issuance of a replacement check.⁷⁴ However, in the latter situation, self-certification may still expedite the rollover by relieving any concerns of the financial institution receiving the rollover.

The IRS seems to have adopted a fairly broad meaning for the term “postal error.” That is, a postal error need not be an error of the Postal Service; rather, it may be an error committed by any person involved in the posting of the letter, including the taxpayer. For example, the IRS granted relief to a taxpayer whose contribution check was returned for insufficient postage⁷⁵ or because an adviser had given an incorrect address.⁷⁶ Similarly, the IRS granted a waiver to a taxpayer whose contribution check was returned because he did not put the recipient’s suite number in the address, and, when he sent the check again, he forgot to endorse it.⁷⁷ The IRS apparently considered the failure to endorse a mailed check to be part of the postal error.

A delay in obtaining information from the distributing plan or IRA that was required by the recipient plan or IRA, despite the taxpayer’s reasonable efforts

Information required by the recipient plan or IRA would include the nature of the distributing account and the nature or identity of the account receiving the contribution. For example, the IRS issued a waiver in a ruling due to the failure of a distributing IRA to honor the taxpayer’s request to inform the recipient trustee that the funds were to be deposited in an IRA account.⁷⁸

In another favorable ruling, a taxpayer attempted to roll over an IRA distribution to an individual retirement annuity offered by an annuity company but canceled the rollover before it became effective. He then attempted to roll over the funds to an IRA with another company but missed the 60-day deadline because the annuity company delayed the taxpayer’s refund.⁷⁹ Unfortunately, however, the kind of delay in this ruling does not appear to be a permissible reason for self-certification. The delay was not an information delay and was not caused by the distributing IRA, since the annuity company was not the trustee for the distributing IRA. Nor does this appear to be an error of the financial institution administering the distributing IRA.

A return to the taxpayer of the proceeds of a federal tax levy on a plan or IRA

Presumably, the IRS would return a federal tax levy on a plan or IRA only if the levy were erroneous. This permissible reason for self-certification appears to be an acknowledgment that it would be unfair to deny self-certification for a violation of the 60-day rule due to an erroneous levy. However, the IRS declined to issue a waiver of the 60-day rule to a taxpayer who withdrew funds from an IRA to avoid a federal tax levy on the amounts in the IRA (even though the IRS notice of intent to levy had been withdrawn before the taxpayer requested the waiver).⁸⁰

Factors that may negate otherwise permissible reasons for self-certification

In an examination, the IRS may take into account all the requirements and conditions for a waiver, whether or not considered for self-certification purposes.⁸¹ Thus, for example, the examining agent may consider whether distributed funds were used for personal purposes or whether the taxpayer actually intended to complete a rollover.

No intent to complete a rollover

In its rulings, the IRS has denied waivers when it believed a taxpayer did not form an intent to roll over a distribution until after the expiration of the 60-day period, even though otherwise good reasons for a delay may have existed. In one unfavorable ruling, an IRA distributed its funds to a trust set up by a decedent. Although the trust could not roll over the funds, the decedent’s surviving spouse had the power to take the funds out of the trust and roll them over to her own IRA. Although the surviving spouse died before the 60-day rollover period expired, the IRS believed there was no credible evidence that she had demanded the funds with the intent of rolling them over.⁸²

In another unfavorable ruling, a widow claimed she had erroneously believed that the tax on distributions from her deceased husband’s retirement plans would be limited to the 20% withholding tax. The IRS, however, questioned her assertion, since she had signed distribution papers explaining the respective tax consequences of a taxable distribution and a nontaxable rollover. The IRS noted it was only after the expiration of the 60-day period, when her tax preparer told her what the actual amount of tax on the distribution would be, that she changed her mind and decided she wanted to roll over the distribution.⁸³

In several other unfavorable rulings, reasons for missing the 60-day deadline appeared to have been sufficient in light of other similar but favorable rulings. However, the IRS indicated that it believed the taxpayers had not originally intended to roll over the distributions but rather formed that intent after the expiration of the 60-day period.⁸⁴ For example, the IRS denied a waiver to a taxpayer who claimed he deposited funds from a distribution into a non-IRA account because of the trustee’s “confusing website.”⁸⁵ Although the IRS has readily granted waivers to other taxpayers who encountered similarly confusing websites,⁸⁶ the IRS appeared skeptical of this taxpayer’s claim that the non-IRA deposit was a mistake, apparently believing instead that the taxpayer had originally decided to forgo a rollover.

Using rollover funds for personal expenses or investment

Although taxpayers who satisfy the 60-day requirement are free to use a distribution for personal expenses or investment during the 60-day interval, the IRS generally feels no obligation to provide a waiver in such a case if the 60-day requirement is violated. For example, taxpayers who possessed reasons normally sufficient to obtain a waiver nevertheless failed to obtain waivers when they used their distributions for payment of personal expenses,⁸⁷ college tuition,⁸⁸ attorney’s fees,⁸⁹ and gifts,⁹⁰ ­as well as for when they used them for the purchase of a retirement home,⁹¹ an assisted-living apartment,⁹² a residence,⁹³ a business investment,⁹⁴ or investment real estate.⁹⁵

The IRS has found it was irrelevant whether taxpayers intended all along to provide replacement funds for the rollovers but failed to do so within the 60-day rollover period because of events beyond their control.⁹⁶ It has even found it irrelevant that the taxpayer lost timely control of the rollover funds due to errors of a third-party bank (that was processing a reverse mortgage intended to provide the rollover funds).⁹⁷ The IRS asserts that taxpayers assume the risk that their expectations may not be realized with respect to voluntary transactions unrelated to the rollover, no matter how otherwise commendable the unrelated transactions may be.⁹⁸

Considerations of equity or good conscience seem to have little bearing on these waiver denials. In one of the rulings, an IRA custodian did not explain rollover options to an elderly taxpayer who used her distribution to pay nursing care costs.⁹⁹ In another, an attorney induced a financially unsophisticated divorced woman to request a distribution to pay the attorney’s legal fees.¹⁰⁰ In still another ruling, the taxpayer used the distribution as a temporary loan to pay his daughter’s tuition expenses until her student loans were approved.¹⁰¹ Thus, the short-term personal use of funds in these rulings appears to have outweighed considerations of equity or good conscience.

As justification for its hardline position, the IRS has asserted that personal use of distributed funds “is not consistent with the intent of Congress to allow portability between eligible retirement plans.”¹⁰² However, as the IRS itself has acknowledged, the tax law permits personal use of funds so long as the taxpayer rolls over the appropriate amount within the allowed 60-day period.¹⁰³ Obviously, too, investing the funds in a personal interest-bearing account at a financial institution does not prevent the issuance of an IRS waiver of the 60-day period.¹⁰⁴

In fact, allowing personal use of funds seems not only consistent with portability, it appears to enhance portability by broadening the population of taxpayers who will complete rollovers. The waiver statutes themselves say nothing about the interaction between waivers and portability. The waiver statutes simply allow the IRS to lengthen the rollover period by delaying the rollover deadline when considerations of equity and good conscience apply.¹⁰⁵ These statutes provide no basis for changing the nature of the rollover period, e.g., by permitting personal expenditures of rollover funds for the original 60-day period but prohibiting them thereafter.

In Rev. Proc. 2003-16, the IRS lists the use of distributed funds as only one of a number of factors that enter into the determination of whether it will grant a waiver. It is of course reasonable to take into account the use of funds as some evidence of an intent not to roll them over. However, there is no indication in the revenue procedure that personal use of funds should trump all other equitable considerations.

Thus, in fairness, personal use of funds should not prevent the IRS from granting a waiver where there are substantial unrelated reasons for granting the waiver. For example, the IRS should grant the waiver to a taxpayer who was unable to timely complete a rollover because of hospitalization for a serious medical condition, whether or not the taxpayer made personal use of distributed funds.¹⁰⁶ At the other extreme, it may be reasonable to deny waivers where personal use of funds, coupled with unrealistic expectations for replacing the funds, is the reason a taxpayer fails to satisfy the 60-day rollover requirement.

The IRS is not entirely consistent in this respect. Letter Ruling 200449039 is a good example of a favorable waiver ruling where the IRS ignored personal use of distributed funds. The IRS granted the 60-day waiver because the taxpayer misunderstood the 60-day rollover period, was late sending forms and funds to his broker, had difficulty with the broker completing forms, used a courier service without weekend service, and was two days late accumulating rollover funds because of difficulty buying and selling securities. Since the taxpayer had to engage in security transactions to accumulate rollover funds, it is obvious he had used the previously distributed funds for personal expense or investment for a period extending at least two days beyond the 60-day period.

Adding to confusion in this area, the IRS has granted relief where a financial institution wrongfully refused to wire rollover funds back to the trustee of the distributing IRA within the 60-day rollover period. The IRS extended the rollover period in this instance even though the taxpayer had used the distributed funds as a bridge loan to acquire a residence.¹⁰⁷ The IRS also granted relief when a taxpayer used a distribution for personal purposes but then missed the 60-day deadline because the bank recipient of the rollover amount provided the wrong mailing address.¹⁰⁸

On the other hand, the IRS denied relief to a taxpayer who wanted his IRA to invest in a partnership. Unbeknownst to the taxpayer, the IRA trustee treated the investment as a distribution. The IRS stated that the taxpayer chose to use the IRA funds to invest in his business venture rather than roll the funds over to an IRA (an obvious misrepresentation of the taxpayer’s “choice”).¹⁰⁹

Fortunately, the IRS agrees that the mere unfulfilled intent to use distributed funds for personal or investment purposes is not sufficient reason to deny a waiver. The IRS granted waivers to taxpayers who changed their minds before actually expending the funds for personal purposes.¹¹⁰

Penalties for lack of rollover intent or for violating the personal-use condition

It appears likely the IRS did not intend to allow self-certifications for taxpayers who used distributed funds for personal purposes or who initially lacked rollover intent. Although the revenue procedure providing for self-certification does not mention these factors, the revenue procedure prohibits “a material misstatement in the self-certification,” and in the model self-certification letter, taxpayers acknowledge that they “must comply with all other tax law requirements for a valid rollover.”¹¹¹ However, the big question in such cases is whether the IRS would try to subject the taxpayer to the 20% accuracy-related penalty for negligence or disregard of rules or regulations or the 75% fraud penalty, if it believed the taxpayer acted unreasonably or in bad faith.¹¹²

Limited review by the courts

The Tax Court recently held that IRS denials of waivers of the 60-day rollover requirement are subject to judicial review. The court concluded it may reverse an IRS denial of a waiver if it finds the Service abused its discretion, i.e., acted “arbitrarily, capriciously, or without sound basis in law or fact.” However, the taxpayer must have actually requested the waiver (i.e., by ruling request, self-certification, or during an examination). A court generally will not find the IRS abused its discretion if it did not have an opportunity to exercise its discretion.¹¹³  

Footnotes

¹ Secs. 402(c)(3) and 408(d)(3)(A)(ii). Rollover contributions may not include any amount paid into an IRA or plan later than the 60th day on which such rollover amount was received. See also Regs. Sec. 1.401(a)(31)-1, Q&A 14, Examples (3) and (4).

² Secs. 402(c)(3)(B) and 408(d)(3)(I), both added by the Economic Growth Tax Relief Reconciliation Act of 2001, P.L. 107-16, for distributions occurring after Dec. 31, 2001.

³ Rev. Proc. 2016-47. The IRS has provided a model self-certification letter that taxpayers may use.

⁴ Id.

⁵ Id.

⁶ Id.

⁷ For example, an automatic waiver may be available for an error of a financial institution (Rev. Proc. 2003-16) or for deposits frozen because of the bankruptcy or insolvency of a financial institution (Sec. 402(c)(7)).

⁸ Rev. Proc. 2016-47, modifying Rev. Proc. 2003-16. Note that Rev. Proc. 2003-16, which provided for automatic waivers of the 60-day requirement and waivers in private letter rulings, did not discuss the grant of waivers during IRS examinations. Nevertheless, the Tax Court has held that IRS authority to grant waivers during IRS examinations dates from Jan. 27, 2003, the effective date of Rev. Proc. 2003-16 (Trimmer, 148 T.C. No. 14 (2017)).

⁹ Secs. 6651, 6662, and 6663; Rev. Proc. 2016-47.

¹⁰ Secs. 4973(a) and (b).

¹¹ Although private letter rulings cannot be cited as precedent, they often provide valuable insight into the IRS’s interpretation of the governing statute. See Trimmer, 148 T.C. No. 14 (2017) (exploring a number of relevant private letter rulings to gain insight).

¹² IRS Letter Rulings 200808030, 200737047, 200502054, 200453019, 200451040, 200449037, and 200445029.

¹³ IRS Letter Ruling 200904032.

¹⁴ IRS Letter Ruling 201246044.

¹⁵ IRS Letter Ruling 200451033.

¹⁶ IRS Letter Ruling 201106025.

¹⁷ IRS Letter Rulings 200504042, 200502054, 200453019, 200447039, 200445029, and 200440026.

¹⁸ IRS Letter Rulings 200507022, 200443040, 200443037, 200444035, and 200439044.

¹⁹ IRS Letter Ruling 201323040.

²⁰ IRS Letter Ruling 200506028.

²¹ IRS Letter Ruling 200506033.

²² IRS Letter Ruling 200905038.

²³ IRS Letter Ruling 200453027.

²⁴ IRS Letter Rulings 200904034 and 200506031.

²⁵ IRS Letter Ruling 200502050.

²⁶ IRS Letter Rulings 200505028, 200445042, and 200443046.

²⁷ IRS Letter Ruling 201103058.

²⁸ IRS Letter Ruling 200506030.

²⁹ IRS Letter Ruling 200905036.

³⁰ IRS Letter Ruling 200809043.

³¹ IRS Letter Ruling 201418065. Compare waivers allowed by the IRS due to employers’ failure to provide information on rollover options (since employers have a definite statutory obligation to provide such information) (Sec. 402(f); IRS Letter Rulings 200453021 and 200503035). Compare also waivers issued for failure to provide correct or complete information on rollover options by financial institutions that did attempt to provide some information on reinvestment considerations (IRS Letter Rulings 200506033 and 200506028).

³² Rev. Proc. 2003-16.

³³ IRS Letter Ruling 200442035.

³⁴ IRS Letter Ruling 200439049.

³⁵ IRS Letter Ruling 201150038.

³⁶ IRS Letter Rulings 201302046 and 200443038.

³⁷ IRS Letter Rulings 200507022 and 200443040.

³⁸ IRS Letter Ruling 200443037.

³⁹ IRS Letter Ruling 200419032.

⁴⁰ IRS Letter Ruling 200439044.

⁴¹ IRS Letter Ruling 200941032.

⁴² IRS Letter Rulings 200502054 and 200532061.

⁴³ Secs. 402(c)(3)(B) and 408(d)(3)(I).

⁴⁴ IRS Letter Ruling 200424008.

⁴⁵ IRS Letter Ruling 200406054.

⁴⁶ IRS Letter Rulings 200742027, 200453022, 200608029, and 201303022.

⁴⁷ IRS Letter Ruling 200510036.

⁴⁸ IRS Letter Ruling 200507019.

⁴⁹ IRS Letter Ruling 200439047.

⁵⁰ IRS Letter Ruling 200503034.

⁵¹ IRS Letter Ruling 200445030.

⁵² IRS Letter Ruling 200439050.

⁵³ IRS Letter Ruling 200933038 (Alzheimer’s); IRS Letter Ruling 200401024.

⁵⁴ IRS Letter Rulings 200508025, 200504036, 200444027, and 200440027.

⁵⁵ IRS Letter Ruling 201323044.

⁵⁶ IRS Letter Ruling 200904028.

⁵⁷ IRS Letter Ruling 200901035.

⁵⁸ IRS Letter Ruling 201130013.

⁵⁹ IRS Letter Rulings 201210046 and 200508030. Similarly, the death of a mother-in-law (IRS Letter Ruling 200716030).

⁶⁰ IRS Letter Ruling 200445031.

⁶¹ IRS Letter Ruling 200510037.

⁶² IRS Letter Ruling 200929022.

⁶³ IRS Letter Ruling 200914072.

⁶⁴ IRS Letter Ruling 201240033.

⁶⁵ IRS Letter Ruling 200944056.

⁶⁶ IRS Letter Ruling 201635011.

⁶⁷ IRS Letter Ruling 200602047.

⁶⁸ IRS Letter Ruling 200442036.

⁶⁹ IRS Letter Ruling 200611039.

⁷⁰ IRS Letter Ruling 201421028.

⁷¹ IRS Letter Ruling 200550041.

⁷² IRS Letter Ruling 201416012.

⁷³ IRS Letter Rulings 200447042 and 200406051.

⁷⁴ IRS Letter Rulings 200430031, 201330047, and 200436017.

⁷⁵ IRS Letter Ruling 201236038.

⁷⁶ IRS Letter Ruling 200545053. See also IRS Letter Ruling 201016092.

⁷⁷ IRS Letter Ruling 200523031.

⁷⁸ IRS Letter Ruling 200522017.

⁷⁹ IRS Letter Ruling 200532061.

⁸⁰ IRS Letter Ruling 200428031.

⁸¹ Rev. Proc. 2016-47.

⁸² IRS Letter Ruling 200453018.

⁸³ IRS Letter Ruling 200508027.

⁸⁴ IRS Letter Ruling 201234034 (“Taxpayer A has not presented any evidence . . . which shows that he had the intent to roll over the distribution. . . .”); IRS Letter Ruling 200452042 (at the time of the distribution, the taxpayer did “not have the intent to roll over the distribution. . . .”).

⁸⁵ IRS Letter Ruling 200941032.

⁸⁶ IRS Letter Rulings 200443038 and 201302046.

⁸⁷ IRS Letter Rulings 201130014, 200504041, and 200417033.

⁸⁸ IRS Letter Ruling 200504037.

⁸⁹ IRS Letter Ruling 200452042.

⁹⁰ IRS Letter Ruling 201439004.

⁹¹ IRS Letter Ruling 200707160.

⁹² IRS Letter Ruling 201243019.

⁹³ IRS Letter Rulings 200432025 and 201336021. The IRS granted a waiver to a taxpayer who used distributed funds as a bridge loan to facilitate a mortgage on the purchase of a residence, although this case, described earlier, also involved a third-party financial institution’s refusal to wire taxpayer’s funds to the IRA trustee (IRS Letter Ruling 200905036).

⁹⁴ IRS Letter Ruling 201618016.

⁹⁵ IRS Letter Ruling 200446030.

⁹⁶ IRS Letter Rulings 200504037 and 200446030.

⁹⁷ IRS Letter Ruling 201118025.

⁹⁸ IRS Letter Rulings 201146024 and 201240031.

⁹⁹ IRS Letter Ruling 200504041. See also IRS Letter Ruling 201243019 (no waiver for widow who broke her shoulder and had signs of mental impairment).

¹⁰⁰ IRS Letter Ruling 200452042.

¹⁰¹ IRS Letter Ruling 200504037.

¹⁰² IRS Letter Rulings 200504041 and 200417033.

¹⁰³ Notice 2002-3; IRS Letter Ruling 9010007.

¹⁰⁴ IRS Letter Rulings 200507017, 200507018, and 200506028.

¹⁰⁵ Secs. 402(c)(3)(B) and 408(d)(3)(I).

¹⁰⁶ See IRS Letter Ruling 201523025 for a particularly egregious application of the IRS position.

¹⁰⁷ IRS Letter Ruling 200905036.

¹⁰⁸ IRS Letter Ruling 201016092.

¹⁰⁹ IRS Letter Ruling 201547010.

¹¹⁰ E.g., IRS Letter Ruling 200406054.

¹¹¹ Rev. Proc. 2016-47.

¹¹² Secs. 6662 and 6663.

¹¹³ Trimmer, 148 T.C. No. 14 (2017).

	Contributor
	Vorris J. Blankenship is a retired attorney and CPA. He is the author of the treatise Tax Planning for Retirees, published by LexisNexis. His website is at retirement-taxplanning.com. For more information about this article, contact thetaxadviser@aicpa.org.