Internal Revenue Code Section 402(c)(3)(B) allows the IRS to waive the 60-day requirement in certain cases. The IRS may waive the 60-day requirement “where the failure to waive such requirement would be against equity or good conscience.” IRS Revenue Procedure (Rev. Proc.) 2016-47 provides guidance for obtaining such a waiver. This Rev. Proc. includes details of how individuals may “self-certify” that they are eligible for a waiver, including a model letter they can complete. Valid reasons for a 60-day rule waiver include financial organization errors, death (or serious illness) of a family member, or depositing a distribution into an account mistakenly believing it was an IRA. Congress has not extended IRS relief to violations of the one-per-12-month rule. And while it may seem that an overly strict enforcement policy might violate “equity or good conscience,” so far, the IRS simply has had no statutory authority to waive the one-per-12-month requirement. Options are limited for violations of the one-per-12-month rule Even when an individual is not at fault, good options are scarce. For example, if a financial organization employee provides inaccurate information about the rule, the individual may still have limited recourse. Here are some approaches to consider: If multiple distributions occur within the 60day window, the individual may limit the tax liability by rolling over the largest one. In our case study, the client could have rolled over a total of $90,000. At least this would have made the problem – not being able to roll over the additional $40,000 – a bit less severe. If the distributing financial organization is at fault (e.g., giving bad advice, not following instructions), the individual may succeed at having the organization agree to void the transaction and redo it as (for example) a transfer. As with any situation like this, the financial organization may have to make a business decision based on possible risks – and may ask for specific written instructions from the client. Some might also insist on a hold harmless agreement. If the financial organization is at fault to any extent, it may decide to offer the client a way to avoid some of the consequences of a failed rollover. In our case study, assume both distributions had been rolled over: the $90,000 one first and the $40,000 second. Here, the second rollover would be disallowed, and the IRA owner would have to treat $40,000 as a regular contribution. If the IRA owner was ineligible to make a regular contribution for the year, he would have to remove the entire $40,000 (plus the net income attributable) as an excess contribution. Further, because this contribution could not be treated as a rollover, it would be taxable to the client in the year it was distributed. Let’s assume that the client would have to pay around 25% in federal and state taxes on $40,000, or $10,000. (If the client were under age 59½, an additional 10% tax would also likely apply.) The financial organization probably would not offer to pay the additional tax, as this would seem to create a bit of a windfall for the client. But it might help start a continued from page 17 If the IRA owner was ineligible to make a regular contribution for the year, he would have to remove the entire $40,000 (plus the net income attributable) as an excess contribution. Further, because this contribution could not be treated as a rollover, it would be taxable to the client in the year it was distributed. coloradobankers.org 18
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