IRS released its new user fees for IRA rulings and they are not only increased, but HUGE increases.

The Average IRS fee for a basic IRA private letter ruling will now be a whopping $9,000!!!

All special discounts which were available in the past to those with less in assets are GONE

Even the bargain 60-day rollover rulings (which were $95 last year) can now run as high as $3,000!!!

The increases are generally effective on February 1, 2006, so if you are contemplating requesting a Private Letter Ruling for an IRA or Plan issue, better get the ruling into IRS, postmarked before February 1, 2006.

What to do now?

If you are about to request a ruling or are in the process of working on one (or you have accountant, attorney or advisor contacts who you know that may have rulings in the hopper) ALERT them now to get that ruling into IRS, postmarked by February 1, 2006, or else pay the new super sized ruling fees.

From now on, rulings will be few and far between. Advisors who know their IRAs, will find themselves valued at a premium, since requesting a PLR after a mistake has been made or to address proposed IRA transactions that the average advisor is not sure of will be too costly for most clients.

We have a situation now where IRS ruling fees will exceed the cost most CPAs and attorneys charge for rulings. The total cost to a client for a typical PLR on an IRA issue will now be somewhere in the $15,000 to $20,000 range depending on the professional fees charged.

This will draw attention to just how complicated this area is and why taxpayers need to seek out IRA distribution specialists to get things done right the first time. Even IRS apparently does not have the resources to deal with the incredible volume of ruling requests from desperate taxpayers and their equally desperate advisors who are unsure of the IRA rules.

What this means to anyone with a retirement plan:

These fees pretty much exceed what most taxpayers are able to pay for an IRS ruling on a particular IRA issue, so few taxpayers will be requesting rulings to correct an IRA mistake or a proposed IRA transaction. If they, their financial advisors, IRA financial institutions or company plans make a mistake on an IRA distribution issue (and mistakes are common) unless there are hundreds of thousands of dollars at stake, the taxpayer will probably just end up paying the tax and walking away.

Make sure your financial advisor, your company or your bank, broker or fund company knows what they are doing when they move your IRA money. IRA and plan money often gets withdrawn when key events occur such as death, age 70 ˝ or when doing rollovers from one retirement plan to another. That is when mistakes are the most common.

For example, there have been over 300 recent rulings requested on 60-day rollover issues alone. For some reason, these transactions seem to create problems mostly due to poor professional advice. IRS allowed many of these mistakes to be corrected when the taxpayer requested a private letter ruling from IRS to get more time to correct the mistake. A botched rollover is one of the worst mistakes that can be made since it means the entire rollover amount becomes taxable all at once. That can spell the end of a lifetime of disciplined saving.

Rather than rely on IRS to provide relief with a private letter ruling (since that is now way too expensive), the better move is not to do a rollover in the first place. Retirement funds should be moved by direct transfers (trustee to trustee transfers) or what the IRS calls a “direct rollover” where the IRA or plan money is transferred directly from one plan or IRS to another without you touching the money in between.

If you named a trust as your IRA beneficiary, you had better make sure that is what you and your beneficiaries really want. Why? Because another area where IRS fields lots of ruling requests is when someone names a trust as their IRA beneficiary and after death spouses and other beneficiaries decide that they do not want that trust. They request private letter rulings to get out of these unwanted trusts. Often the family was never aware that the IRA owner named the trust as the beneficiary instead of the spouse or family members directly. With the new IRS fees for private letter rulings, this will now be an expensive process costing more than the original attorney fees to prepare the trust.

Are you proposing taking funds out of your IRA or plan before reaching age 59 ˝ and want to structure payments under as a series of substantially equal periodic payments ( a 72(t) payment plan) in order to avoid the 10% penalty? If you do not propose a payment plan that meets the exact requirements of the tax rules, you will have to request a private letter ruling from IRS to make sure your customized 72(t) payment plan will be acceptable to be exempt from the 10% penalty. From now on, if you cannot afford the high IRS ruling fees, you better stick to the book and not try anything fancy. Maybe that is what IRS had in mind.

These are just some of the many IRA and plan distribution issues that taxpayers routinely go to IRS for and request an opinion via a private letter ruling. That will no longer be the case for most taxpayers who just won’t be able to afford the luxury of an IRS ruling.

The official pronouncement for your reference is:

IRS Revenue Procedure 2006-8

Released by IRS on January 3, 2006.