IRS Policy on Waiving the IRA Rollover Deadline

An individual can avoid taxation and the 10% early withdrawal penalty from an IRA or qualified plan distribution (other than required distributions) if they return the funds to an IRA or qualified plan within 60 days. This is commonly referred to as a rollover.

Prior to the passage hardship provisions included in the Economic Growth and Tax Relief Reconciliation Tax Act of 2001, the only time in which the IRS had the authority to waive the penalty for not completing an IRA rollover within the statutory 60-day period was if the transfer was not made in a timely manner due to military service in a combat zone or a presidentially-declared disaster. Under the hardship provisions, for distributions made after 2001, the IRS has the power to grant a waiver of the 60-day requirement if failure to do so 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.

Criteria for automatic waiver - The IRS provides guidelines for the waiver of the 60-day rollover rule. Generally, the 60-day rule is automatically waived if ALL of the following apply:

• The financial institution receives the funds on the taxpayer's behalf before the end of the 60-day rollover period.

• The taxpayer followed all the procedures set by the financial institution for depositing the funds into an eligible retirement plan within the 60-day period (including giving instructions to deposit the funds into an eligible retirement plan).

• 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.

• The funds are deposited into an eligible retirement plan within one year from the beginning of the 60-day rollover period.

• It would have been a valid rollover if the financial institution had deposited the funds as instructed.

Criteria for waiver based on facts and circumstances - If the taxpayer does not meet the criteria for automatic waiver, but still believes that he or she meets the requirements due to the facts and circumstances of his or her situation, the taxpayer can apply for a hardship exception to the 60-day rollover requirement by requesting a letter ruling, accompanied by the required user fee.

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. All relevant facts and circumstances will be considered in determining whether to grant a waiver. The Revenue Procedure specifically includes:

• Whether the errors were caused by the financial institution.

• 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.

• Whether the taxpayer used the amount that was distributed.

• How much time has passed since the date of distribution.

Most taxpayer requests for waivers under the revenue procedure have been granted. The IRS has been quite lenient in granting favorable private letter rulings concerning the 60-day requirement. Since the inception of, only a few dozen rulings have denied a waiver. Many of the waivers were denied because the taxpayer used the funds with the expectation of replacing them within the 60 days. In other rulings, taxpayers originally had no intent to roll over the proceeds until they became aware of the tax consequences. In addition, taxpayers using ignorance of the law as an excuse have not received favorable rulings.

When the IRS is determining whether to grant a waiver to the 60-day requirement, what the taxpayer originally intended to do with the proceeds holds a lot of weight in the determination. Taxpayer “intent” has been quoted in many of the rulings both for the benefit and to the detriment of the taxpayer. 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 and the original intent does not appear to be an issue, the IRS will most likely rule in favor of the taxpayer. Also, 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. Under those circumstances, use of the funds has been ignored.

Please call our office if you need more information or have a specific question about the IRS’s policy.

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