Fact Taxpayer Continued to Work and Travel Cause IRS to Find Medical Condition Wasn’t Really What Prevent Timely IRA Rollover

Apparently many taxpayers can’t resist the temptation to “borrow” from their IRA accounts, making use of the rollover rules found in IRC §408 to get their hands on cash they are “sure” they will be able to return within 60 days. Unfortunately, when things don’t quite work out the taxpayer may look to a tax adviser to somehow save the day.

In the situation described in PLR 201625022 there was certainly an attempt at creative thinking to come up with a rationale under which the IRS would grant late rollover relief. Unfortunately the IRS noticed that the taxpayer’s story just didn’t quite hold together, so relief was denied.

The taxpayer in this case needed funds due to a situation that often leads to this issue—the fact that real estate sales take a while to close, and in the interim there may be a cash flow crunch.

As the PLR explains the situation:

On April 8, 2015, Taxpayer A and her spouse put their vacation home up for sale in order to raise funds to purchase their daughter's home. Prior to the sale of their vacation home, in order to avert foreclosure, Taxpayer A took a distribution of Amount 1 from IRA B on April 24, 2015. Taxpayer A used Amount 1, on April 27, 2015, to purchase her daughter's home.

Taxpayer A intended to redeposit Amount 1 into her IRA within the 60-day rollover period which ended on June 23, 2015. However, the sale of the vacation home was not completed until July 1, 2015, after the 60-day period had expired. During the 60-day period, insufficient funds were available to complete the rollover.

Up to this point the situation is a textbook case of when the IRS won’t grant relief—not only had the funds been taken out for a reason other than simply transferring the funds, the funds had actually been used by the taxpayer and, on the date she should have rolled the funds back into the account she simply had no funds available.

The IRS has outlined the procedures they will use to judge “acceptable” situations in which relief can be granted in Revenue Procedure 2003-16. Obtaining money to save your daughter’s home from foreclosure is not one of the reasons provided—but a failure to complete a rollover due to a medical condition that made the rollover impossible is.

So the taxpayer decided to try and use the medical option and to show that there was another source of funds—so, absent the medical problem she would have completed the rollover timely:

Taxpayer A indicated that her spouse was willing to take a distribution from his IRA within the 60-day period to complete the rollover but her medical condition prevented this from occurring. Upon the receipt of the funds from the sale of her vacation home on July 1, 2015, Taxpayer A attempted to complete the rollover but realized the 60-day period had expired.

But the IRS had a problem with the assertion that it was her medical condition that blocked the rollover—because, per the information provided, her medical condition didn’t seem to stop her from activities there were clearly more involved than asking her husband to withdraw funds from his IRA and deposit them into her IRA account:

In this instance, however, the Service finds that the documentation and materials provided by Taxpayer A do not demonstrate how any of these factors resulted in her failure to accomplish a timely rollover of Amount 1. Taxpayer A represented that her inability to complete a rollover of Amount 1 was caused by her medical condition during the 60-day period. However, we are not convinced that Taxpayer A's medical condition prevented a timely rollover considering her continued work and travels. Taxpayer A used the funds as a short term loan to purchase her daughter's home and, as a result, sufficient funds were not readily available until the sale of her vacation home after the 60-day period had expired.

So while the taxpayer (or perhaps her adviser) gets points for thinking “out of the box” when faced with a situation that appeared hopeless, the problem is that the reason cited for allowing a late rollover simply wasn’t credible—the IRS believed (not unreasonably in this author’s opinion) that this was simply a taxpayer that gambled on a sale closing before the 60 days were up—and she lost the bet.