While the IRS has issued numerous private letter rulings over the years granting taxpayers relief for late IRA rollovers, far fewer rulings have been issued denying relief. But in PLR 2020033008[1] the IRS did just that for a taxpayer’s request for permission to make a late rollover, as the taxpayer had effectively attempted to borrow the funds from the IRA to make a cash offer on a residence.

Most advisers have heard it claimed that taxpayers can use the rollover rules to allow that taxpayer to borrow funds from the IRA and then roll the funds back in. This “loan” provision referred to is found at IRC §408(d)(3)(A):

(A) In general Paragraph (1) does not apply to any amount paid or distributed out of an individual retirement account or individual retirement annuity to the individual for whose benefit the account or annuity is maintained if—

(i) the entire amount received (including money and any other property) is paid into an individual retirement account or individual retirement annuity (other than an endowment contract) for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution; or

(ii) the entire amount received (including money and any other property) is paid into an eligible retirement plan for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received, except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross income (determined without regard to this paragraph).

For purposes of clause (ii), the term “eligible retirement plan” means an eligible retirement plan described in clause (iii), (iv), (v), or (vi) of section 402(c)(8)(B).

The IRS has conceded that, if the requirements are strictly followed, the taxpayer can do what he/she wishes to do with the funds, a key requirement being returning the funds within 60 days.

While IRC §408(d)(3)(I) does grant the IRS the authority to waive a late rollover “where the failure to waive such requirement would be against equity or good conscience,” the agency has stated clearly that returning a “loan” late will not meet that criteria. The agency’s view is that while the “borrowing” noted above is permitted since nothing in the IRC bars it, that was not the purpose of the rollover provision. That provision was meant to allow taxpayers to move funds from one account to another and, in the view of the agency, it is not against “equity or good conscience” to deny relief when a taxpayer was using the provision for other purposes.

But this taxpayer was hopeful that the situation the taxpayer faced was different enough to allow for such relief:

In Year 1, Taxpayer A and his spouse worked with a real estate agent in selling their existing home and purchasing a new one. The real estate agent advised Taxpayer A to make a cash offer for the purchase of a new residence using funds from IRA B. The real estate agent assured Taxpayer A that he could repay the amount back into his IRA at a later time, after the sale of his current residence, and made no mention of the 60-day rollover period.

Lacking other available funds and acting on the advice of the real estate agent, Taxpayer A completed a distribution request form provided by Financial Institution C. Taxpayer A indicated on the form that the purpose for the distribution was to purchase a new home. Financial Institution C’s distribution request form stated that the individual requesting a distribution and signing the form understands that a 10 percent tax penalty and ordinary income taxes may apply to the distribution, and the individual agrees to obtain legal and tax advice to make this determination. Although the form provided a rollover option, it made no mention of the 60-day rollover period.

On Date 2, Taxpayer A withdrew Amount 1 from IRA B to purchase the new residence. On Date 3, Taxpayer A used the distribution of Amount 1 for the purchase of his new house. On Date 4, after the expiration of the 60-day rollover period, Taxpayer A’s prior residence was sold. After this sale, Taxpayer A contacted Financial Institution C to try to repay Amount 2 (a portion of total distribution Amount 1), back into IRA B. However, Financial Institution C informed him that it could not accept the repayment of Amount 2 because the 60-day rollover period had passed.[2]

The taxpayer argued that since the financial institution had not informed the taxpayer about the 60-day rollover rule, the IRS should grant relief based on what the taxpayer saw as an error of the financial institution.

However, the IRS pointed out the following:

However, unlike a plan qualified under section 401(a), the Code does not impose a requirement on an IRA custodian to inform individuals of the rollover rules, and the failure of the realtor and the financial institution to provide this information does not rise to the level of financial institution error.[3]

Thus, the IRS goes on to deny the taxpayer’s request for relief:

In this case, the information and documentation submitted show that Taxpayer A withdrew Amount 1 from IRA B for use as a short-term, interest-free loan to purchase a new home. One of the factors in Rev. Proc. 2003-16 is the use of the amount distributed, for example, whether the amount was cashed. The Committee Report describing legislative intent indicates that Congress enacted the rollover provisions to allow portability between eligible plans including IRAs. Using a distribution as a short-term loan to cover personal expenses is not consistent with the intent of Congress to allow portability between eligible plans. Therefore, under the facts and circumstances presented in this case, the Service declines to waive the 60-day rollover requirement with respect to the distribution of Amount 2 from IRA B.[4]

[1] PLR 2020033008, August 15, 2020 https://www.irs.gov/pub/irs-wd/202033008.pdf (retrieved August 15, 2020)

[2] PLR 2020033008, August 15, 2020, p. 2

[3] PLR 2020033008, August 15, 2020, pp. 3-4

[4] PLR 2020033008, August 15, 2020, p. 4