The IRS is often strict about meeting deadlines, but it does show some compassion to taxpayers who cannot complete an IRA rollover within the 60-day deadline because of extenuating circumstances.

In a new Private Letter Ruling, the IRS waived the 60-day rule because a taxpayer's medical conditions hurt her ability to manage her finances. In recent years, the tax agency has demonstrated leniency in some cases that involved events beyond taxpayers' control.

Factors Considered by the IRS

When considering whether or not to waive the 60-day requirement, the IRS considers all the relevant facts and circumstances, including:

  • Errors made by financial institutions.
  • An inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country and postal errors.
  • How the funds were used. For example, if a payment was made by check, was the check cashed?
  • The passage of time since the distribution.

The IRS "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."

The General Rules

Normally, you can roll over funds from one IRA to another tax-free as long as you complete the rollover within 60 days. (However, tax is automatically withheld unless the funds are directly transferred from one trustee to another.)

If you inherit an IRA from your spouse, you can choose to roll over the funds into your own IRA, as long as you meet the 60-day deadline.

Meeting the deadline is crucial. If you don't complete a rollover within the 60-day window, the withdrawn amount is treated as a taxable distribution to you as the account owner. That is painful enough, but there's more. If this failed rollover happens before you reach age 59 1/2, you may also get hit with the 10 percent premature withdrawal penalty tax. That is doubly painful. In addition, you may owe state income tax.

The IRS has the discretion to waive the 60-day requirement if its imposition would go "against equity or good conscience."

Facts of the New Ruling

A woman withdrew funds from her IRA on December 22, 2011. She contacted a financial institution about how to roll over the distribution. On January 8, 2012, the institution sent the taxpayer instructions via e-mail. However, she did not complete the rollover transaction until March 16, 2012, which was after the 60-day deadline expired.

She requested a waiver from the 60-day rule from the IRS. She provided a statement from a doctor that stated she had several medical conditions that impaired her mental memory, concentration and judgment. She was also prescribed medications for the conditions and was granted an award for Social Security disability during the 60-day period.

The IRS issued a Private Letter Ruling that stated the taxpayer's medical condition impaired her ability to manage her financial affairs during the 60-day period so the rollover requirement was waived. (IRS PLR 201315036)

What is a Private Letter Ruling?

    A Private Letter Ruling only applies to the specific taxpayer who asks for the written advice. It cannot be relied on as precedent by other taxpayers or IRS personnel. However, the IRS publishes private letter rulings, which taxpayers and their advisers can use as guides to help understand how the agency thinks about a topic. When an individual requests a ruling and pays the appropriate fee, he or she will receive a letter with a decision and the reasons behind it.

Other Private Letter Rulings

In earlier Private Letter Rulings, the IRS granted other taxpayers relief from tax bills and penalties:

1. Weather - For example, one taxpayer from Maine was unable to complete a rollover transaction on time because a major snowstorm made it impossible to get to the bank. The IRS granted a hardship waiver because bad weather was beyond her control. (IRS PLR 200406054)

2. Lack of information from employer - An employer failed to inform a retiring employee about the tax consequences of accepting a lump-sum distribution from the company's 401(k) plan. The employee was granted a waiver because he wasn't aware that he had to roll over the funds to an IRA within 60 days to preserve the tax-free treatment. (IRS PLR 200905035)

3. Alzheimer's - A 68-year-old taxpayer who was diagnosed with progressive Alzheimer's disease made a series of withdrawals from his IRA to purchase a house -- even though he had other funds available. Based on a medical evaluation requested by his daughter, it was determined that the taxpayer was incapable of understanding the tax consequences of making IRA withdrawals. The IRS waived the 60-day rollover requirement. (IRS PLR 200401025)

4. Financial institution error - The IRS approved a waiver when a financial institution failed to follow a taxpayer's instructions to wire money to an IRA. The taxpayer had temporarily used IRA funds for a bridge loan to help buy a home. After the permanent loan was approved on the 57th day, the institution would not wire the money because the taxpayer still had three days to void the loan. (IRS PLR 200905036)

5. Death of a loved one - A taxpayer's late husband owned an IRA. Before he turned age 70 1/2, he withdrew some of the funds. After his death, the taxpayer -- who was the sole beneficiary and under age 70 1/2 at the time -- cashed in the funds and deposited the money in an IRA in her own name. However, she did not complete the rollover within 60 days. The taxpayer told the IRS she was in mourning over the death of her husband during the time frame for the rollover. She was also involved in arranging her husband's funeral and managing his estate. The IRS accepted the widow's claim, noting that the waiver request was submitted shortly after the taxpayer discovered she had missed the deadline. (IRS PLR 200415012)

6. Disability impaired judgment - A 69-year-old disabled individual received a stock distribution he did not request. Due to his disability, he misunderstood the tax impact, believing that no tax would be due unless he cashed in the distribution. The individual was also distressed by the deteriorating medical condition and hospitalization of his mother. Based on the facts and circumstances, the IRS allowed a waiver for missing the 60-day deadline. (IRS PLR 200905037)

These are only some examples of waivers granted by the IRS. If you think you -- or a loved one -- might qualify for a hardship waiver, consult with your tax adviser about requesting a ruling from the IRS.

Important Details

Here are a couple of details about the 60-day rollover rule that are important:

1. The 60-day period begins the day after you receive funds from the account in question. That can be a beneficial rule because every day counts.

2. Unlike most tax deadlines, there is no extension granted if the rollover period ends on a weekend or holiday. So, for example, if the 60-day period ends on a Sunday, the rollover deadline is not extended to the following Monday.

Conclusion: Obviously, the best way to avoid problems with an intended tax-free retirement account rollover is to complete the transaction within the 60-day window. In addition, it is advisable to conduct rollovers via direct trustee-to-trustee transfers whenever possible. That way, the funds pass through fewer hands, which reduces the chances of something going wrong.

Although the 60-day rule is well-known, taxpayers still miss it all the time for various reasons. In general, the IRS is unsympathetic. However, all may not be lost. As illustrated by the cases detailed above, the IRS has granted relief for missed rollovers in certain circumstances. Consult with your tax adviser about your situation.

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