60 day rule mistake
The client completed paperwork with 401k instituiton requesting direct rollover. The institution cut the client a check withholding 28%. The client held check, waiting for mistake to be corrected. The insitution refuses to correct saying it was too late as the books for 2009 are closed (check dated 12/30/09). Client cashed check in February. Client not aware of any of the rollover rules and was referred to me this week. Is it worth an application to the IRS? Original amount was $100,000, now $78,000 due to withholding. Any comments or advice appreciated.
Permalink Submitted by Alan Spross on Tue, 2010-03-16 23:51
It might be, but would check that direct rollover request carefully, and if it was done correctly, would pursue this aggressively with the plan administrator. But the remainder should be rolled over ASAP to an IRA to show good faith should the direct appeal fail and a waiver would have to be requested from the IRS. It appears that this case does not appear eligible for an automatic waiver, but it should have a good chance for success with a specific appeal. The following is a copy of Sec 402(c)(3)B:
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(3) Transfer must be made within 60 days of receipt
(A) In general
Except as provided in subparagraph (B), paragraph (1) shall not apply to any transfer of a distribution made after the 60th day following the day on which the distributee received the property distributed.
(B) Hardship exception
The Secretary may waive the 60-day requirement under subparagraph (A) where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.
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It is interesting how the plan came up with a withholding percentage other than the 20% mandatory withholding. Hopefully, client did not request it.
Permalink Submitted by mk foss on Thu, 2010-03-18 02:48
In order to apply to the IRS for a waiver of the 60-day requirment, there is a fee of $3,000 for a $100,000 IRA; the fee for an IRA between $50,000 and $99,999 is $1,500. In addition to that you’ll need professinal fees to write up the request and shepherd it though the IRS. Ed tells me that is often at least $5,000. You should consider the cost of an IRS ruling when decided to pursue this.
The IRS doesn’t automatically grant these waivers. As Alan indicated, you’re facts have to be crystal clear that a rollover was always the intention.
Permalink Submitted by Bruce Steiner on Thu, 2010-03-18 21:42
The IRS has issued numerous waivers of the 60-day deadline (and has denied to waive the deadline in many cases as well). We’ve obtained rulings in about a half dozen such cases.
A good starting point is Revenue Procedure 2003-16, which says that the IRS will consider all of the facts and circumstances, including “(1) errors committed by a financial institution, …; (2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; (3) the use of the amount distributed (for example, in the case of payment by check, whether the check was cashed); and (4) the time elapsed since the distribution occurred.”
As a practical matter, it is difficult (if not impossible) to get a favorable ruling unless you fit within the categories cited in the Revenue Procedure.
Mark may want to search the rulings to see if there have been any that were similar to the facts of this case. While private letter rulings cannot be used as precedent, they can sometimes be an indication of the IRS’ thinking.
Estimating legal fees can be difficult. I think Mary Kay’s estimate would make sense for a relatively straightforward case such as the taxpayer’s illness. But I think Mark will be spending some extra time here in searching through the rulings to find the most analogous situations. Given the circumstances, perhaps Mark can get the employer to cover some or all of the legal fees and the IRS’ user fee.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL