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Examining Agent Abused Discretion by Refusing to Consider Late Rollover Relief Requested by Taxpayer

The IRS claimed that prior to the publication of Rev. Proc. 2016-47 those involved in the examination of a taxpayer’s return were barred from considering granting a waiver of the 60-day rollover period—the taxpayer had to have applied for a private letter ruling request for a waiver under Rev. Proc. 2003-16.  The Tax Court, ruling in the case of Trimmer v. Commissioner, 148 TC No. 14, did not find that the IRS was operating under any such restriction and ruled that the Tax Court had jurisdiction to consider whether the IRS had abused its discretion in refusing to grant such a waiver.

Mr. Trimmer suffered from major depressive disorder after a job he believed he had secured for himself to supplement his income after retiring from the New York Police Department fell through and he was unable to find substitute work.  Shortly after he began suffering from the disorder he received distribution checks from his retirement account.  He left the checks on his dresser at home for over a month and then deposited them into a regular, non-IRA bank account.

Mr. Trimmer did not make use of those funds while they in the non-IRA account.  Due to his depression he delayed going to see his tax preparer until late in the following tax season.  The preparer at that time discovered the Forms 1099R and he advised Mr. Trimmer to put those funds into an IRA account, which he did.  The problem was that the 60-day period had long ago expired and the tax adviser did not suggest that Mr. Trimmer obtain an IRS private letter ruling to obtain IRS permission.

The IRS computers eventually noticed the problem and a CP2000 was issued to the taxpayer.  The taxpayer wrote the IRS asking for relief:

I am contesting the amount of money said to be owed. Please allow me to explain the situation. In April 2011 I retired from my job and took a pension loan. After my retirement I went through a period of depression and was not managing my affairs. I received my check for the loan and deposited it into Santander bank on July 5, 2011. The money remained in this account until April of 2012 when it was switched to an I.R.A. in the same bank where it remains to this day.

A few points

  • There was no deception or spending, investing of the money at all. I received the check and deposited it into the bank
  • My wife and I have been paying taxes for a combined 60 years and NEVER had the least bit a problem.
  • There was no harm done to anyone with the money staying in the bank except me (I was receiving 0.25% interest.)
  • I switched the money to an I.R.A. before I was notified by the I.R.S.

I am now employed again and am driving a school bus and have a son in college and another a year away. To pay $40,000 in taxes for money that is in an I.R.A. would absolutely cripple my family as it would be 3 years of my salary. Sir no harm was done to anyone. I went through a rough time upon separation from my job, causing me emotional hard times that caused this situation. Penalizing me and my family would not benefit anybody, only cause extreme duress and punish my children who played no part in this situation. I ask you to consider these facts and please come to a fair decision. Please contact me if you need at [phone number redacted].

The IRS wrote Mr. Trimmer and told him “You don’t need to do anything else for now. We will contact you again within 60 days to let you know what action we are taking.”  But three days later Mr. Trimmer received a letter from the operations manager denying his claim for relief, though the agency did invite Mr. Trimmer to write and tell them why he disagreed.  Not surprisingly, Mr. Trimmer did not write again and outline his hardship.

The IRS issued the Notice of Deficiency and Mr. Trimmer filed his petition in Tax Court.

IRC §402(c)(3)(B) provides the following details of the IRS’s authority to waive the 60-day rollover requirement:

Hardship exception.--The Secretary may waive the 60-day require- ment under subparagraph (A) 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 individual subject to such requirement.

At time of Mr. Trimmer’s letter to the IRS, the agency’s guidance on this topic was found in Rev. Proc. 2003-16 which generally outlined how to apply, via a private letter ruling, to the agency for relief under the above rule.  The IRS argued that, since Mr. Trimmer had not followed that revenue procedure, he did not qualify for relief.

In Rev. Proc. 2016-47, issued after the letter in question, the IRS did issue  specific guidance on providing waivers during an exam.  That document states:

SECTION 4. ADDITIONAL WAIVERS DURING EXAM

In addition to automatic waivers and waivers through application to the IRS under Section 3 of Rev. Proc. 2003-16, the IRS, in the course of examining a taxpayer’s individual income tax return, may determine that the taxpayer qualifies for a waiver of the 60-day rollover requirement under § 402(c)(3)(B) or 408(d)(3)(I).

The Tax Court did not accept the IRS’s view that the employee dealing with the exam could not have granted the waiver.  The Court points out that the law itself provided no such constraint on the IRS’s ability to grant relief.  As well, while Rev. Proc. 2003-16 may not have specifically discussed granting relief during an exam, it did not indicate that the letter ruling was the sole method under which relief can be granted.

The Court noted the Internal Revenue Manual at 4.10.7.4(2) (Jan. 1. 2006) contains language that would appear to, by default, grant examining agents the right to consider all issues of the taxpayer:

Examiners are given the authority to recommend the proper disposition of all identified issues, as well as any issues raised by the taxpayer.

The Court also dismissed the IRS’s argument that the Court had no jurisdiction to look into the IRS’s decision on the matter of granting relief.  The Court noted the statute itself did not indicate that the decision was beyond review—rather the Court had the right to review the IRS’s action to determine if it represented an abuse of authority.

As the Court noted, citing the case of Estate of Gardner v. Commissioner, 82 TC 1000, an automatic denial of the request without considering the facts and circumstances of the case, as took place here, would “constitute the very essence of arbitrary administrative action and an abuse of the discretion granted.”

The Court concludes:

In denying Mr. Trimmer’s request for a hardship waiver, respondent’s agent, proceeding on what appears to have been an incomplete understanding of the pertinent statutory provisions, failed to address or even acknowledge any of the facts and circumstances Mr. Trimmer set forth in his letter.