IRS Relaxes 60-Day Tax-Free Retirement Plan or IRA Rollover Requirement

by Candace Quinn and Irina Razumovskaya

A distribution from a retirement plan or IRA is generally taxable unless it is rolled over into a retirement plan or IRA within 60 days. In most cases this would make the distribution non-taxable assuming the recipient is eligible to make pension rollovers and the distribution itself is eligible for a rollover. In an effort to streamline compliance with the 60-day limit for tax-free retirement plan or IRA rollovers, the IRS has issued Revenue Procedure (Rev. Proc.) 2016-47 which provided a method for certain taxpayers who miss the 60-day limit.

Taking effect August 24, 2016, the new guidelines allow taxpayers who have missed the 60-day rollover period to avoid taxation in certain circumstances, without having to resort to the complicated and burdensome procedure of requesting a private letter ruling (PLR) from the IRS. Prior to this issuance of Rev. Proc. 2016-47, a hardship waiver could be applied for through a PLR if the 60-day deadline was missed. Submitting a PLR is both a costly and slow undertaking; it can take a significant length of time to receive a determination from the IRS of whether the facts and circumstances meet the hardship standard. Now, taxpayers can rely on the guidance provided in Rev. Proc. 2016-47 with regard to tax-free rollover treatment and may even use the sample Certification for Late Rollover Contribution, appended to the Procedure, if needed.

Rev. Proc. 2016-47 provides that self-certification is allowed only in certain specific circumstances, listed by the IRS. These include a mistake made by a financial institution or a postal office, misplacement of a check, severe damage to a principal residence, death or serious illness of a family member, incarceration, and restrictions imposed by a foreign country, among others. The timeframe for making the correct rollover contribution after the 60-day deadline is defined as “as soon as practicable” after the allowed circumstance. This is a somewhat broad guideline which has been deemed to be within 30 days following the resolution of the reason preventing the taxpayer from making the contribution. The IRS also announced that it would revise reporting requirements for the pension plan administrators and will require them to report late rollovers made under the Revenue Procedure.

With this new Revenue Procedure the IRS has effectively switched approaches from pre-authorization, where taxpayers were required to seek relief, to monitoring, where taxpayers can rely on a tax-free treatment unless notified otherwise by the IRS. However, the IRS has cautioned that the new procedure does not remove the 60-day requirement, as the rollover still must be made as soon as practicable after the conditions impeding it cease to exist. The IRS reserved the right to disallow the tax-free treatment and impose failure to pay penalties under Internal Revenue Code section 6651 if it finds the taxpayer did not comply with the requirement.