Late Rollover Allowed When Custodian Transferred Funds to State Agency Without Taxpayer's Knowledge

What happens if your IRA runs afoul of (or your custodian believes it runs afoul of) your state’s unclaimed property law and the account is forwarded to the state?  Well, technically your funds are no longer held by an IRA custodian—a problem, as that creates a deemed distribution of the funds in the IRA.

This problem appears to be what confronted the taxpayer in PLR 201504021.  The facts indicate that the IRA custodian, without the taxpayer’s knowledge, transferred the taxpayer’s account to “Division M of State N.”  While the exact details are, as required, redacted, it seems reasonable to assume that “Division M” was the state’s unclaimed property department.

The IRA beneficiary wasn’t aware of the issue until he contacted his tax preparer in April of 2014.  Though it’s not clear why visiting his preparer would have lead to the discovery, at that time he became aware the funds had left the bank.  Presumably the preparer may have been looking for information on the account that eventually lead to the discover the account was no longer at the bank. 

But however it happened, the taxpayer now contacted the state agency and by the end of April had the money back.  That was the good news—the bad news was that it appeared he had a taxable distribution and would also lose any future tax deferral benefit from earnings on the fund, since more than 60 days had elapsed since the money left the IRA account.

At this point the taxpayer asked for a private ruling granting relief from the 60-day rollover period from the IRS.

Although not directly listed as a reason for granting relief in Revenue Procedure 2003-16, the IRS decided that, under these circumstances, the fact that the taxpayer was unaware of the original distribution provided what the IRS found to be a situation in which they would grant the relief.