The “kinder, gentler” IRS seems to be making a limited return in the area of IRS waivers of late IRA rollovers. Recent rulings have taken a broader view than the IRS did in the past of a financial institution “error” for which the IRS deem to meet the test in Revenue Procedure 2003-16. An example of a rather broad view of financial institution error is found in PLR 201530024.
Generally, Revenue Procedure 2003-16 discusses the criteria the IRS will use to determine if relief will be granted to a taxpayer who fails to timely rollover a distribution from an IRA or qualified retirement plan. An error committed by a financial institution is the first fact listed as being relevant to determine if relief will be granted and, generally, the IRS grants such relief if it determines the failure was due to such error.
Initially following this ruling the IRS had tended to require there to be an affirmative error on the part of the financial institution. If, instead, the taxpayer simply had failed to understand the type of account he/she was opening when they filled out an application to open an account without the assistance of anyone from the institution, that was deemed to be a taxpayer error not eligible for relief. However, if the taxpayer had asked an employee at the institution to open an IRA account and that person failed to handle the paperwork properly, that was a financial institution error for which relief would normally be granted.
But in the case of this ruling the taxpayer had not sought such advice prior to the end of the 60-day period. The taxpayer had noticed a newspaper advertisement for an online bank that was advertising a higher rate of interest on its CDs. He took the money out of the IRA he had to buy a CD at the online bank. Within a couple of days after taking the funds the taxpayer deposited the amount on-line, with the new bank, into a new account.
The facts in the ruling do not indicate that he ever talked with any live person at the new bank until the month following the end of the 60-day period. At that point he called the new bank to confirm the account was an IRA account and was informed that this online bank did not offer IRA accounts—so, clearly, the account in question was not an IRA.
The IRS decided to grant the late rollover, officially holding that the new bank had provided misleading information to the taxpayer regarding the transaction. That’s true even though the facts outlined in the ruling never actually state what was “misleading” about the information in question. And, in any event, the statement seems to suggest that the taxpayer misunderstood what information he did find.
The good news is that the IRS does appear to be very sympathetic to allowing taxpayers to “fix” rollover errors, even if it appears the taxpayers themselves made most of the error. The bad news is that, despite this, in almost all situations the taxpayer will still need to incur the expense of obtaining a private letter ruling to obtain this relief.