A person who receives a distribution from a qualified 401 (k) plan, a retirement benefit, or participation or an individual retirement account (IRA) may defer recognition of taxable income by transferring the distribution to another IRA or a plan qualified within 60 days upon receipt of this distribution. Unfortunately, there are many situations where there are no timely deposits due to unintentional errors or unforeseen circumstances. If the participant does not renew within 60 days, the person will not only be subject to tax on the total value of the distribution but may also be subject to a 10% penalty for early distribution.
The Internal Revenue Code allows the IRS to deviate from the 60-day rule, if the violation of this requirement is contrary to justice or good conscience, including victims, disasters, or other escaping events that are reasons beyond the control of the person subject to this requirement.
However, in most cases, obtaining an exemption from the 60-day rollover obligation involves filing for a private letter bankruptcy, which can be an expensive undertaking, as it involves paying IRS user fees currently set at 10,000 dollars.
In the 2016-47 income procedure, published on August 24, 2016, the IRS explains how a taxpayer can now self-certify the justification for a 60-day exemption from the obligation, then complete and declare the waiver as if it had been granted. A plan administrator or custodian can rely on self-certification to allow late rollover, but it is not mandatory.
There are three conditions for using the self-certification procedure:
• The IRS must not have previously rejected a request to waive the full or partial renewal of the distribution;
• The violation of the 60-day rule must result from one or more of the 11 specific circumstances; and
• The transfer should be made as soon as possible after the applicable circumstances no longer prevent the taxpayer from making the deposit. Completion of the transfer within 30 days is considered to meet this requirement.
The circumstances listed that justify an automatic exemption eligible for self-certification are as follows:
• The financial institution did not distribute or receive the contribution;
• Distribution was made in the form of a check, lost and never cashed;
• The distribution was deposited and remained in an account that the taxpayer mistakenly considered to be an eligible pension plan;
• The taxpayer's principal residence has been severely affected;
• A member of the taxpayer's family has died;
• A family member or the taxpayer was seriously ill;
• The taxpayer has been arrested;
• A foreign country has imposed restrictions;
• A postal error has occurred;
• The distribution was made at the expense of an IRS guarantee, and the product of the guarantee was returned to the taxpayer; or
• The distributing party to which the rollover refers delays in providing the information that the beneficiary's plan or the IRA has requested to complete the rollover, despite the taxpayer's reasonable efforts to obtain the information.
The plan administrator or the IRA custodian can count on this self-certification unless he has real knowledge of the self-certification. However, the plan administrator or the IRA custodian cannot rely on self-certification for other purposes (such as waiving the one-year replacement rule). Also, an IRA custodian who accepts a rollover contribution after the 60 days must report this fact on Form 5498.
This new procedure unquestionably provides delightful relief to many taxpayers, but it is not a panacea. The administrators and custodians of the IRA plan do not have to accept self-certification, and we expect many large institutions will continue to insist on a private card decision. Also, the IRS itself has warned that self-certification does not amount to a 60-day exemption from the requirement. If the IRS, during an audit or another audit, establishes that the exemption conditions have not been met, the rollover tax will be invalidated, and the taxpayer will be subject to taxes and fines.
Each taxpayer in this situation must assess the circumstances to determine whether they will use the self-certification process or request a decision by private letter. Factors that will be considered include the dollar amounts involved, the circumstances that require non-payment of the transfer within 60 days, the availability of the administrator/tutor of the IRA plan to accept self-certification, and the risk tolerance of the transaction.
A+ Income Taxes