May 18, 2011

IRS Hangs Tough on IRA 60-Day Rollover Deadline

In a recent private letter ruling (PLR 201118025), IRS got pretty tough with a taxpayer whose IRA rollover took a bit longer than the permissible 60 days.

IRS sometimes offers a bit of leniency in these cases. Rev Proc 2003-16 outlines the situations in which leniency might be appropriate, and notes "The Service will issue a ruling waiving the 60-day rollover requirement in cases 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 taxpayer." But not so in this case.

Here, the taxpayer and his siblings wanted to help their elderly mother purchase (for cash) a new residence, necessitated by her mobility limitations which made it unsafe for her to remain in her two-story residence. So, the taxpayer took a distribution from his IRA and applied the funds toward a new residence for his mother who then secured a reverse mortgage to generate the funds to repay the taxpayer and his siblings.

Despite assurances from the bank (that the mortgage process would be completed in time to enable the taxpayer to meet his 60-day rollover requirement) delays ensued and the taxpayer missed the deadline. He pled mercy -- claiming that his failure to timely complete the rollover was due to "numerous and unreasonable processing delays" which "were beyond his control."

But IRS concluded that the taxpayer had not presented any evidence as to how any of the factors outlined in Rev Proc 2003-16 affected his ability to timely complete the rollover. Those factors include:

  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; and
  4. The time elapsed since the distribution occurred.

IRS' position in this case was that none of the above applied -- the taxpayer's IRA funds were simply used to make a short-term loan to Mom. Period.

Bottom line -- push the 60-day time limit at your own peril.