The 60-day rollover rule: Self-certifying waiver eligibility.

• Author: Blankenship, Vorris J.

In the past, most individual retirement account (IRA) and retirement plan trustees have refused to accept rollover contributions of distributed funds that have been held by a taxpayer for more than 60 days, regardless of the circumstances. The trustees often advise the taxpayer to obtain a private letter ruling that waives the 60-day requirement. The IRS may, of course, waive the 60-day requirement if failure to do so "would be against equity or good conscience." (2) Now, however, the IRS has provided a certification alternative to a letter ruling that, while not itself an IRS waiver of the 60-day requirement, allows a taxpayer to avoid the time and expense of obtaining a ruling while still reassuring skeptical trustees.

Upon receiving a proper written certification from a taxpayer, an IRA or plan trustee may now accept a rollover contribution even though the taxpayer has violated the 60-day requirement. That is, the trustee may honor the taxpayer's self-certification that he or she has permissible reasons for failing to satisfy the 60-day rollover requirement (unless the IRA trustee or plan administrator otherwise knows the rollover is not valid). (3) The permissible reasons for self-certification may be any one or more of the following:

1. An error by the distributing or recipient financial institution;

2. A misplaced distribution check that was never cashed;

3. A distribution deposited and remaining in an account that the taxpayer mistakenly thought was an eligible retirement plan;

4. Severe damage to the taxpayer's principal residence;

5. Death of a member of the taxpayer's family;

6. Serious illness of the taxpayer or a member of the taxpayer's family;

7. Incarceration of the taxpayer;

8. Restrictions imposed by a foreign country;

9. A postal error;

10. A delay in obtaining information from the distributing plan or IRA that was required by the recipient plan or IRA, despite the taxpayer's reasonable efforts to obtain it; or

11. A return to the taxpayer of the proceeds of a federal tax levy on a plan or IRA.

To maintain the validity of a self-certification, taxpayers must make their rollover contribution to an IRA or plan as soon as practicable after the reasons for the delay no longer exist. However, a contribution within 30 days thereafter will automatically satisfy this requirement. (4)

Note that a self-certification is not an IRS waiver of the 60-day rollover requirement. However, a certifying taxpayer may still report the contribution as a valid rollover until informed otherwise by the IRS. Not surprisingly, though, a certification is invalid if the IRS previously denied a waiver request with respect to a rollover of all or part of the distribution. (5)

Waiver approved or denied in the course of an IRS examination

An IRA trustee must report self-certifications to the IRS, thus increasing the likelihood of an examination. The IRS, in an examination, will consider whether a taxpayer's rollover satisfies the requirements for a waiver. For example, the IRS may determine that a waiver is not available because of a material misstatement in the self-certification. Or the IRS may find that the reasons claimed for missing the deadline did not prevent timely completion of the rollover. Or the IRS may find that the taxpayer failed to make the contribution as soon as practicable after the reasons for delay no longer existed. (6)

In addition to reviewing self-certifications, the IRS may on examination review the factual basis for an automatic waiver (7) or the factual basis for a previous private letter ruling granting a waiver. In addition, the IRS has now confirmed that an agent may grant a waiver in the course of an examination, even in the absence of a self-certification or favorable ruling. (8) Nevertheless, a previous self-certification would be more likely to induce an IRS agent to provide a waiver, and a favorable private letter ruling should give a taxpayer some welcome assurance even before a transaction is consummated.

If, on examination, the IRS does not allow a waiver for violation of the 60-day rule, the distribution will be included in the taxpayer's income and the potentially applicable penalties could include the penalty for failure to pay tax and the accuracy-related or fraud penalties. (9) To the extent applicable, the IRS would also assert the penalty for excess contributions (for contributions made to the recipient IRA or qualified plan). (10)

Permissible reasons for self-certification in light of prior rulings

Although the IRS has listed the permissible reasons for self-certification, the Service has not further elaborated on their meaning and scope. It is clear, however, that the permissible reasons are much more limited in number and scope than the many reasons the IRS found acceptable in prior favorable private letter rulings. Nevertheless, some of those prior rulings can be helpful in analyzing the permissible reasons for self-certification, (11) as the following discussion of each permissible reason demonstrates.

An error by the distributing or recipient financial institution

Favorable IRS rulings involving financial institution errors are plentiful. In most of those rulings, a taxpayer directs an employee of a financial institution to establish a rollover IRA, but the employee instead deposits the taxpayer's funds into a non-IRA account. (12) For example, the IRS granted relief when a financial adviser prepared confusing rollover documents, and the recipient financial institution initially put the rollover funds into an IRA account but later erroneously transferred them to a non-IRA account. (13)

The IRS granted relief when an IRA rollover failed because a financial institution erroneously deposited the rollover funds into an inherited IRA account instead of a regular IRA account. (14) Another waivable error occurred when a taxpayer instructed a financial institution employee to reinvest funds into a type of IRA investment the financial institution did not ordinarily accommodate (U.S. savings bonds), and the employee erroneously treated the request as a termination of the IRA. (15) The IRS also granted a waiver when a financial institution closed a taxpayer's IRA for nonpayment of fees but did not inform the taxpayer until after the 60-day period had expired. (16)

Various other financial institution errors have also led the IRS to grant waivers. (17) However, it was not entirely clear in some of these favorable rulings that the error was entirely that of the financial institution. A close reading of the rulings indicates that some errors may have been due, at least in part, to negligence of the taxpayer. (18) Fortunately, though, if such errors are not considered financial institution errors, many of them may still be errors subject to self-certification as erroneous deposits by taxpayers to non-IRA accounts (permissible reason No. 3 above).

The IRS will generally issue a favorable ruling when a financial institution provides erroneous advice regarding a rollover. For example, the IRS granted a waiver where the plan custodian erroneously informed the taxpayer that her investment in the plan exceeded the amount of her total distribution. (19) Similarly, the Service waived violations where a bank employee erroneously said that a taxpayer could not roll over an IRA distribution because the taxpayer was over age 591/2 (20) and where a bank employee erroneously stated that a taxpayer would be taxed 10% if he completed a rollover. (21)

In fact, in one ruling, a distributing financial institution's mere failure to inform a surviving spouse that the distributing account was an IRA constituted sufficient reason for a waiver. (22) It does not matter that the misinformed person is handling the affairs of another taxpayer, e.g., a son or daughter acting for a parent with dementia or Alzheimer's. (2)

The IRS has allowed taxpayers to correct intended trustee-to-trustee rollovers (i.e., direct transfers) where a financial institution paid out all or part of the funds to the wrong party and the 60-day rollover period expired. For example, taxpayers received favorable rulings where a financial institution erroneously withheld income tax from a direct transfer and paid it over to the IRS. (24) The IRS has even given a 60-day waiver to the personal representative of a deceased taxpayer who had attempted the failed direct transfer. (25)

In some favorable rulings, a third party (e.g., a broker, (26) financial adviser, (27) or former spouse (28) acting on the taxpayer's behalf) failed to direct the financial institution to establish an IRA. The IRS nevertheless provided relief as if it were a financial institution error. In similar fashion, the IRS granted relief where a taxpayer missed the 60-day deadline because a third-party financial institution erroneously declined to wire the taxpayer's funds to the IRA trustee. (29) However, taxpayers probably cannot self-certify these types of errors since they were not committed by either the distributing or recipient financial institutions (although deposits into non-IRA accounts might arguably qualify as taxpayer errors under permissible reason No. 3 above).

The IRS has generally held that it is not financial institution error if a financial institution declines to explain the tax consequences of an IRA distribution. In one ruling, a distribution was prompted by the statement of the...