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Saturday, May 03, 2008


Individuals may transfer funds from one qualified retirement plan or IRA into another without triggering income tax if the transfer is completed within 60 days. If the rollover is not completed by the 60th day, bad things can result - principally, the potential income taxes on the transferred amount, with applicable penalties and interest, the potential loss of deductions and exemptions due to the phase-outs based on resulting increase in adjusted gross income, and a 10% penalty on early withdrawal for taxpayers under age 59 1/2.

Internal Revenue Code Sec. 408(d)(3)(I) grants the power to the IRS to waive the 60-day requirement if penalizing the taxpayer would be against equity or good conscience. The Code specifically lists casualty, disaster, or other events beyond the reasonable control of the individual subject to the requirement as good reasons.

The following summarizes the automatic waiver and the discretionary waiver provided by the IRS, and how these are applied in practice. This summary is based in large part on an article by Linda Nelsestuen And Wesley Austin in December 2007 issue of Practical Tax Strategies.

  1. Automatic Waiver - If the taxpayer's situation meets all of the criteria in Rev Proc 2003-16, 2003-1 CB 359 , the 60-day rule is automatically waived. To qualify, among other criteria the following must apply:
    1. The financial institution receives the funds within the 60 day period;
    2. The funds are not deposited into an eligible retirement plan within the 60-day rollover period solely because of an error on the part of the financial institution; and
    3. The funds are properly deposited within one year from the beginning of the 60-day rollover period.
  2. Facts and Circumstances Waiver - Rev Proc 2003-16 provides that the Service will issue a ruling waiving the 60-day rollover requirement for cases in which the failure to waive such requirement would be against equity or good conscience. This consists of casualty, disaster, or other events beyond the reasonable control of the taxpayer. Facts the IRS consider include:
    1. Whether the errors were caused by the financial institution;
    2. Whether the taxpayer was unable to complete the rollover due to death, disability, hospitalization, incarceration, or restrictions imposed by a foreign country or postal error;
    3. Whether the taxpayer used the amount that was distributed;
    4. How much time has passed since the date of distribution.
  3. IRS Denial of Discretionary Facts and Circumstances Waivers in Practice.
    1. In practice, many waivers are denied because the taxpayer used the funds with the expectation of replacing them within the 60 days, or taxpayers originally had no intent to roll over the proceeds until they became aware of the tax consequences.
    2. Taxpayers using ignorance of the law as an excuse have not received favorable rulings.
    3. Relying on the advice of counsel has been an appropriate reason.
    4. Taxpayer intent is very important. If the original intent was something other than rolling the money over into another IRA, the Service will most likely rule against the taxpayer. However, if the taxpayer has a documented medical or mental condition that precluded him or her from transferring funds in a timely manner, the original intent does not appear to be an issue, and the IRS will most likely rule in favor of the taxpayer.
    5. The use of the funds as a short-term loan is not viewed favorably unless the taxpayer has a debilitating illness and was physically or mentally unable to complete the transaction within the required time.
    6. A lack of understanding of the law, reliance on the advice of non-financial advisors, and a belated realization as to the adverse tax consequences have not been found to be acceptable reasons to grant a waiver.

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