IRS understands and sometimes forgives
When money is withdrawn from an IRA, but is planned to be repaid to that IRA custodian or a new IRA custodian (so it is not taxable), it is required to be repaid within 60 days of receipt.
IRS Letter Ruling (PLR) is not supposed to be relied upon by other taxpayers, but it does give some information and guidance about what IRS will do.
Let’s call her Ann, withdrew funds from her IRA on Dec. 22, 2011. In January 2012, she contacted a financial institution asking how to roll over the distribution to an account there. They emailed her instructions on how to do the nontaxable rollover.
However, she did not complete the rollover until March 16, 2012, — more than 60 days from her receipt of the distribution in December.
IRS found that she did not have to pay the 10 percent penalty for a withdrawal that was not rolled over within 60 days of receipt. She was able to document that she had several medical conditions that impaired her mental abilities. Her doctor gave a statement that explained she had medical problems that caused faulty memory, poor concentration, poor judgment and impaired decision making abilities. She was granted a Social Security Disability Award during the rollover period.
IRS said the information she presented and the related documentation provided enough evidence that her failure to do the timely (within 60 days of receipt) rollover meant the penalty would be waived, not assessed. IRS found the March 16, 2012 (late) rollover was penalty free as long as it met the other requirements (and it did).
The Private Letter Ruling also explained the inability to complete the rollover timely could be due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, postal error and errors committed by a financial institution.
Ann had good reasons why she did not meet the 60 day time period to do IRA rollovers, but more importantly, she documented the reasons.
When dealing with IRS, more documentation is better than less. Just explaining is usually not enough. IRS needs some evidence or documentation to show the explanations are complete and valid.
By the way, the tax rule is only one tax-free IRA-to-IRA rollover per IRA account can be made within a one year period. It is not something that many folks should do. If you need to borrow some money for a month or so, try borrowing from a bank instead of your IRA.
Did you hear? “The older we get, the fewer things seem worth waiting in line for.”
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.