The IRS is notoriously picky about taxpayers following its rules. But occasionally it gives taxpayers a little more leeway than usual. For instance, suppose you miss the 60-day deadline for IRA rollovers.
Strategy: Don’t concede the issue without a fight. If it would be against “good conscience” or otherwise inequitable to hold the taxpayer responsible, the IRS may waive the requirement. The IRS will examine the relevant facts and circumstances to make its determination.
Surprisingly, the IRS has been lenient in granting such requests in recent years.
Here’s the whole story: Generally, a participant can roll over funds in one IRA to another IRA tax-free, as long as the rollover is completed within 60 days. Otherwise, the rollover is treated as a taxable distribution. Plus, a 10% penalty tax may be imposed for distributions prior to age 59½.
A new private ruling demonstrates the IRS’ approach. (IRS PLR 201026039)
Facts: A husband and wife are the primary caretaker’s of the wife’s sister. The sister suffers from mental illness and other medical conditions. The wife is the sister’s legal guardian.
Both the husband and wife had IRAs with certificates of deposit. When the CDs expired, the couple intended to move the funds to an IRA with a different financial institution to obtain a better rate of return. However, after they received checks from their IRAs, they failed to meet the deadline for IRA rollovers. There were two primary reasons for the failure:
- The wife’s sister was undergoing special medical testing at the time.
- The couple learned that the state was cutting funding for the sister’s care, thereby causing stress-related illness for the wife, for which she needed her own medical treatment.
Upon receiving a notice from the original financial institution, the couple redeposited the checks in their IRAs. The IRS acknowledged that extenuating circumstances caused the couple to miss the rollover deadline. Accordingly, it granted the couple a waiver from tax liability.
Tip: The best option is to ensure that you meet rollover deadlines, but a waiver request may be used as a fallback position.