The IRS recently released Revenue Procedure (Rev. Proc.) 2016-47, which became effective on Aug. 24, 2016, and simplifies the process for correcting late rollovers between IRA accounts in order to alleviate potential tax penalties.
Currently eligible distributions from an IRA directly to a participant can be made tax free if contributed within 60 days to another IRA. This allows the individual time to determine if the distribution was appropriate for his or her circumstances and return the funds to another IRA to avoid both the recognition of taxable income and any related early withdrawal penalties. Previously, taxpayers who missed the 60-day period had to receive a private letter ruling in order to obtain a waiver, which can be a lengthy process.
Circumstances may occur that delay the 60-day determination period beyond the individual’s control. In addition to not having a prior denial by the IRS, one of 11 circumstances to waive tax if the rollover was missed must be applied as follows:
- An error occurred on part of the financial institution that made the distribution or received the contribution.
- The check was misplaced or never cashed.
- The taxpayer made a mistake and placed the deposit into an account he or she perceived to be a retirement plan.
- There was significant damage to the taxpayer’s principal residence.
- A member of the taxpayer’s family died.
- The taxpayer or a member of the taxpayer’s family was seriously ill.
- The taxpayer was incarcerated.
- Restrictions were imposed by a foreign country.
- The distribution was made under a levy under Internal Revenue Code Section 6331 and the proceeds of the levy were returned to the taxpayer.
- A delay in obtaining information from the party making the distribution.
In order to apply the ruling, the taxpayer applies a self-certification procedure to the IRA trustee or plan administrator that the contribution satisfies the terms of the revenue procedure. This can be relied on in good faith, but will not apply if the IRA trustee or plan administrator had knowledge to the contrary. This certification must be in writing and the ruling provides a model letter that may be adopted for this purpose. The certification should be kept in the taxpayer’s records in case of an audit.
The contribution must be made as soon as practicable within a 30-day safe harbor which provides that the contribution is made 30 days after the reasons that no longer prevent the taxpayer from making the contribution. The IRS will be updating Form 5498 to allow for the acceptance of an IRA rollover after 60 days based on the certification. In addition to this current notice, taxpayers may rely on Rev. Proc. 2003-16 which allows for waivers due to financial institution errors. In order to avoid any possible penalties for IRA rollover situations, taxpayers can consider a direct trustee to trustee transfer from one IRA account to another.
These current options will allow additional tools for tax planning purposes for individuals who invest in IRAs either through direct contributions or distributions from a 403(b) or 401(k) individual account.Kimberly Flett CPA, QPA, QKA, CHRS is Managing Director, National Practice Leader ERISA STS Compensation and Benefits, and is a member of the NTSA Communications Committee.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.