IRA rollover twice in 1 year
An 86 year old person’s IRA in the stockmarket was losing a lot of value, so the person cashed out the IRA and personally took it to 2 banks and set up IRAs there. At that time, banks were failing, and the IRA was larger than the FDIC insurance, so the person took all the money to another more secure bank and set up an IRA. It is not allowed to roll an IRA twice in one year, and there will be $160,000 in tax because of this mistake. Do you think there is a way to get out of paying that tax by appeal or?
Permalink Submitted by Alan Spross on Fri, 2010-06-11 23:45
While there are hundreds of favorable rulings made to waive the 60 day rollover time limit, I am not aware of any specific rulings that address the one rollover rule. The reason for this is probably due to custodian failure to recognize breach of this time limit. Both the 60 day limit and number of rollovers are mostly enforced at the custodian level because the dates of rollovers are not reported to the IRS, just the year.
I think that the lower PLR ruling fee for the 60 day rollover also applies to the one rollover waiver ruling request. With the financial meltdown punishing retirees assets, there is probably a sympathy factor in favor of this taxpayer. There is also the thinking that govt regulatory failure is largely responsible for putting savers in this position in the first place. Conversely, the FDIC limit for IRAs was 250k all along, therefore this person had been rolling the dice before the meltdown occurred with respect to FDIC limits. That might not play well in a ruling request. But with the large tax amount at stake here, a ruling request is probably worth the effort.
The person’s RMD at age 86 is about 7% of the balance, so that amount is not rollover eligible anyway if the RMD had not been taken prior to the rollover. If a ruling is not requested, the person also has the option of which rollover of the two they want excluded from income. Perhaps one of them had a somewhat lower amount than the other and they could elect to exclude the larger one from income in the event that the PLR request fails.
Permalink Submitted by [email protected] on Sat, 2010-06-12 05:18
Alan,
I think you raise some excellent points about the enforcement of the once-per-year rollover rule. I would agree that it’s very difficult, given the present reporting system, for this to be kept track of. I would venture to guess that there are more than a fair share of these “illegal” rollovers performed on a daily basis even.
I would however, respectfully disagree on why we haven’t really seen that many PLRs requesting relief from the once-per-year rollover rule. Under § 408(d)(3)(I) of the Code, the Service is explicitly granted the power to extend the 60-day rollover rule (under certain circumstances). No such language exists in the Code though, granting the same flexibility for once-per-year rollover errors. PLRs 200749016 and 200749018 both lend support to this (they are essentially the same). I think you could also draw the same conclusion from IRS Notice 2009-82.
As I am sure you recall, Notice 2009-82 was the notice that granted blanket relief for IRA (and plan) owners who had who had taken unwanted “required minimum distributions” earlier in the 2009 year. Per the Notice, unwanted RMDs that were already received were eligible for rollover up until November 30, 2009 (or 60 days if later). In the notice, IRS specifically warned that because WRERA did not change the once-per-year rollover rule, only one RMD that was taken from an IRA would have been eligible for the relief. One could assume that if IRS had the authority to provide extra relief in this area in the same way they do for 60-day issues, they would have done so.
Since I do not believe the IRS has the authority to waive or grant relief from the once-per-year rollover rule, I would generally not advise a client to seek such a ruling. I think the best bet is probably to go with your suggestion of rolling over the greater of the two distributions (if they are not equal). Perhaps, if it was the financial institutions fault (as in the PLRs referenced above), a denied ruling could be used as support in a civil trial, but that is out of my area of expertise. Perhaps if Bruce reads this he will have insight as to whether it would be of use in that situation.
Also, Patricia – not that it matters anymore in this case, but because it is somewhat related to your initial question; There is actually an exception to the once-per-year rollover rule for distributions made from a financial institution for which the FDIC is the receiver. To qualify, the distribution can not be initiated by either the IRA owner or the custodian, and it must be made because the institution is insolvent and the receiver is unable to find a buyer for it.
Permalink Submitted by Bruce Steiner on Sun, 2010-06-13 02:14
Jeff: I saw the initial question, but was not able to come up with a solution.
Permalink Submitted by [email protected] on Sun, 2010-06-13 04:41
Bruce,
Thanks for the reply. I was actually wondering whether you had any insight regarding my comment “Perhaps, if it was the financial institutions fault (as in the PLRs referenced above), a denied ruling could be used as support in a civil trial, but that is out of my area of expertise.”
I know litigation isn’t the area of law you focus on, but I couldn’t think of too many other attorneys that would have seen my comment as quickly as you.
Permalink Submitted by Bruce Steiner on Sun, 2010-06-13 13:53
I do get involved both some tax litigation and estate and trust litigation. But this is more of an evidence question, so I would defer to the litigators on it.
What facts are there in this case that suggest that this was due to the financial institution’s error?
Permalink Submitted by [email protected] on Sun, 2010-06-13 16:52
Bruce,
In this case it appears to be the client’s fault. I was just trying to think of a reason someone would try and seek a plr for a second rollver within a year. It’s a ruling I don’t think could granted under the current code/regs. The thought crossed my mind though that it might be helpful to prove to a court the damages resulting from the transaction. But I didn’t want to speculate on that too much since I have 0 litigation experience.
Permalink Submitted by Bruce Steiner on Mon, 2010-06-14 04:31
If you need to get a ruling on one issue, if it won’t add much work to the ruling request, you might ask for a ruling on a second issue even though the chance of getting a favorable ruling on the second issue is small.
I had that situation in PLR 200919005: http://www.irs.gov/pub/irs-wd/0919005.pdf. I needed to get a ruling allowing a late reverse QTIP election. While I was at it, I asked for a ruling on another issue (not discussed in the ruling), even though I knew that the chance of getting a favorable ruling on the second issue was small.
I don’t know who the attorney for the taxpayer was in PLRs 200749016 and 200749018, but perhaps that was the case in those rulings.
Permalink Submitted by Pat Cramer on Wed, 2010-06-16 16:48
Thank you everyone for your input.