Taxpayer Denied Late Rollover Relief Despite Medical Condition Due to Use of Funds to Pay Personal Bills

The IRS under IRC §408(d)(3)(l) has the authority to waive the 60 day period for the rollover of funds from one IRA account to another and, in Revenue Procedure 2003-16 one of the reasons enumerated by the IRS for granting such relief is if the taxpayer is prevented from completing the rollover due to medical issues.

So the taxpayer in PLR 201523025 should have been in good shape.  After taking a distribution that he planned to roll over to improve his return from one IRA account the taxpayer suffered a medical injury at work and was put on medical leave.  That leave period expired after the end of the 60 day period.  As well, he was caring for his disabled spouse at the time.  The IRS has quite often granted relief based on such facts.

But in this case there are additional facts that caused the IRS to decide to deny relief.  The taxpayer ended up taking the funds out of the account he had parked them in pending transfer to a new IRA account and use the funds to pay personal expenses during the 60 day period.  The funds were not returned to the account until over six months after the 60 day period expired.

The IRS found, therefore, that the funds were used to obtain a short-term, interest free loan that was used to pay personal expenses.  The IRS states in this ruling that the Committee Report when Congress enacted the rollover rules indicated that the purpose was to provide portability between retirement plans.  Using the distribution as a short-term loan is not consistent with Congressional intent and, as such, the IRS determined that these circumstances do not justify a waiver.

This case illustrates that even if a taxpayer has a situation that would appear to meet the tests for relief, the taxpayer must nevertheless insure that he/she acts to complete the rollover as soon as possible—and that the IRS does care about the use of the funds, especially if that use of the funds would have rendered a rollover impossible even if the matter described in Revenue Procedure 2003-16 had not occurred.