It’s not often that the IRS throws us a bone to save you money and make lives easier, but that’s exactly what Revenue Procedure 2016-47 does. Before this new procedure, taxpayers had just 60 days to complete a rollover from one type of retirement account to another eligible account. Now, with this revenue procedure, if someone misses the 60-day deadline due to one of 11 specific reasons, there’s a simple way to take care of the problem.
Before this new procedure, a botched rollover meant you had to include the funds in their taxable income and pay an additional 10 percent penalty. Even though Congress enacted legislation in 2001 that allowed for hardship waivers due to circumstances beyond the taxpayer’s control, the IRS made it hard to get that waiver; getting one required a private letter ruling, which came with an automatic user fee. For the first few years, this fee was only $95, but by 2016, the fee skyrocketed to $10,000. That fee was on top of professional fees charged by the attorney or CPA who did the work.
With this new procedure, which has been effective since Aug. 24, 2016, you can self-certify that they qualify for a hardship waiver. Self-certification is done by simply sending a form letter to the financial institution receiving the funds. The revenue procedure includes a sample letter that can be used verbatim, or as a model, as long as the letter includes essentially the same information as the sample letter.
You just need to fill in the blanks, check the box for the qualifying circumstance, sign and send it to the financial institution receiving the contribution. They should keep a copy of the letter with their tax records.
The plan administrator, IRA trustee or custodian of the institution receiving the contribution can rely on the self-certification when issuing Form 5498, IRS Contribution Information, to indicate that a rollover contribution was received. This will be reported as a normal, tax-free rollover on your clients’ 1040s and won’t be subject to the early distribution penalty.
Here are the 11 eligible circumstances:
- Error made by financial institution — this can be either the one making the distribution or the one receiving the rollover.
- Misplaced check that was never cashed.
- Distribution was deposited into, and remained in, an account that the taxpayer mistakenly thought was an eligible retirement account.
- Principal residence severely damaged.
- Death of a member of the taxpayer’s family.
- Taxpayer, or a member of their family, was seriously ill.
- Taxpayer was incarcerated.
- Restrictions imposed by a foreign country.
- Postal error.
- Distribution was made on account of an IRS levy and the proceeds of the levy were returned to the taxpayer.
- The institution making the distribution delayed providing information needed to complete the rollover.
If you are audited, you’ll probably need to verify that you qualified under one or more of the permissible reasons. In addition, IRS agents now have the authority to grant a waiver on the spot in an audit.
You also have a 30-day safe harbor to contribute the funds into an eligible account. The 30 days begin as soon as the qualifying conditions no longer prevent them from making the contribution.
Two conditions of note are not on the list: that you relied on erroneous information from an advisor and that you borrowed money from their retirement account, but were unable to repay it within 60 days.
Of course, the best way to do a rollover is a direct trustee-to-trustee transfer, but that’s not always possible. At least now when something goes wrong in a rollover, we have an easy way to fix it.