I have been so busy lately with various projects that I hadn’t really paid close attention to recent revenue procedures issued by the IRS.
But as I was catching up on my reading, I ran across Revenue Procedure 2016-47, and I highly recommend you read it, too.
It deals with IRA rollovers, but first, let’s review the IRA rollover rules for a second. You can roll over an IRA from custodian to custodian as many times per year as you want. When you take a distribution from your IRA, you have 60 days to put it back into the IRA that you took it from, or into another IRA, without paying tax on the distribution.
Because many people were taking advantage of this, there was a US Tax Court case that concluded that you can make only one of these rollovers, once a year.
Now, we have Rev. Proc. 2016-47, which was issued by the IRS in August. It deals with rollovers that go to the taxpayer first, and then 60 days later are rolled over into an IRA. I keep saying IRA, but I really mean any retirement account that falls under Code Section 401(a). You now have excuses for why you missed that 60-day rollover grace period. And here’s the thing: the taxpayers themselves self-certify their own statement of why they missed the 60-day rollover requirement.
From the IRS:
You would complete the Model Letter in the appendix to Revenue Procedure 2016-47 or a substantially similar letter and present it to the financial institution receiving the late rollover contribution. You will be entitled to a waiver if ALL of the following are true:
The rollover contribution satisfies all of the other requirements for a valid rollover (except the 60-day requirement).
You can show that one or more of the reasons listed in the Model Letter prevented you from completing a rollover before the expiration of the 60-day period.
The distribution came from an IRA you established or from a retirement plan you participated in.
The IRS has not previously denied your request for a waiver.
The rollover contribution is made to the plan or IRA as soon as practicable (usually within 30 days) after the reason or reasons for the delay no longer prevent you from making the contribution.
The representations you make in the Model Letter are true.
So, you might ask: What is in the Model Letter, and what are the excuses? Here is an explanation from the IRS:
An error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;
The distribution, having been made in the form of a check, was misplaced and never cashed;
The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;
The taxpayer’s principal residence was severely damaged;
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;
A postal error occurred;
The distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer; or
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.
Now, let’s examine this for a moment. Let’s say you have a client who misses the 60-day rollover window. You can simply have your client roll over the money with a client self-certification letter saying that the check got lost in the mail. How can that be disputed?! It could even be that the client thought the account in which the check was deposited was a retirement account, but it wasn’t.
The potential excuses are endless, and the best part is the client self-certifies this lapse in time.
It is a virtual free-for-all. I warn you, pay attention to the guidance that will inevitably follow this revenue procedure. This will definitely be exploited, and guidance will absolutely be given. In fact, I have a client right now who missed the 60-day rollover window. In his case, his check got lost in the mail and he had to have it reissued.
Every once in a while, you just have to shake your head and wonder what the IRS is thinking.