On August 24, 2016 the Internal Revenue Service (IRS) issued Revenue Procedure 2016-47, which is effective immediately. In this Revenue Procedure the IRS provides for a self-certification procedure (subject to verification on IRS audit) that may be used by a taxpayer claiming eligibility for a waiver under Internal Revenue Code (IRC) Sections 402(c)(3)(B) or 408(d)(3)(I) with respect to a rollover into a plan or individual retirement arrangement (IRA). It provides that a plan administrator, or an IRA trustee, custodian, or issuer (hereafter all referred to as IRA trustee), may rely on the certification in accepting and reporting receipt of a rollover contribution. It also modifies Revenue Procedure 2003-16, by providing that the IRS may grant a waiver during an examination of the taxpayer’s income tax return. An appendix contains a model letter that may be used for self-certification.
The rollover rules for qualified plans and IRAs provide that distribution paid directly to a plan participant or IRA owner will be exempt from taxation if the amount is rolled over to an eligible retirement plan within 60 calendar days from the date the individual receives the distribution.
IRC Sections 402(c)(3)(B) and 408(d)(3)(I) provide that the IRS may waive the 60-day rollover requirement “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”.
IRS Revenue Procedure 2003-16 provides guidance to taxpayers on applying for a letter ruling requesting a waiver of the 60-day rollover requirement. The letter ruling process is costly and time-consuming.
New self-certification procedure
IRS Revenue Procedure 2016-47 provides for a self-certification procedure, allowing a taxpayer to complete a rollover after the 60-day period. An IRA trustee can accept the self-certification. The IRS will provide a method for IRA trustees/custodians to report these self-certified late rollovers on IRS Form 5498.
Here is the pertinent text from Revenue Procedure 2016-47:
SECTION 3. SELF-CERTIFICATION
.01 Written self-certification. A taxpayer may make a written certification to a plan administrator or an IRA trustee that a contribution satisfies the conditions in Section 3.02 of this revenue procedure. This self-certification has the effects described in Section 3.04 of this revenue procedure. Taxpayers may make the certification by using the model letter in the appendix on a word-for-word basis or by using a letter that is substantially similar in all material respects. A copy of the certification should be kept in the taxpayer’s files and be available if requested on audit.
.02 Conditions for self-certification.
(1) No prior denial by the IRS. The IRS must not have previously denied a waiver request with respect to a rollover of all or part of the distribution to which the contribution relates.
(2) Reason for missing 60-day deadline. The taxpayer must have missed the 60-day deadline because of the taxpayer’s inability to complete a rollover due to one or more of the following reasons:
(a) an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;
(b) the distribution, having been made in the form of a check, was misplaced and never cashed;
(c) the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;
(d) the taxpayer’s principal residence was severely damaged;
(e) a member of the taxpayer’s family died;
(f) the taxpayer or a member of the taxpayer’s family was seriously ill;
(g) the taxpayer was incarcerated;
(h) restrictions were imposed by a foreign country;
(i) a postal error occurred;
(j) the distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer; or
(k) the party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.
(3) Contribution as soon as practicable; 30-day safe harbor. The contribution must be made to the plan or IRA as soon as practicable after the reason or reasons listed in the preceding paragraph no longer prevent the taxpayer from making the contribution.
This requirement is deemed to be satisfied if the contribution is made within 30 days after the reason or reasons no longer prevent the taxpayer from making the contribution.
.03 Reporting on Form 5498. The IRS intends to modify the instructions to Form 5498 to require that an IRA trustee that accepts a rollover contribution after the 60-day deadline report that the contribution was accepted after the 60-day deadline.
.04 Effect of self-certification.
(1) Effect on plan administrator or IRA trustee. For purposes of accepting and reporting a rollover contribution into a plan or IRA, a plan administrator or IRA trustee may rely on a taxpayer’s self-certification described in this Section 3 in determining whether the taxpayer has satisfied the conditions for a waiver of the 60-day rollover requirement under § 402(c)(3)(B) or 408(d)(3)(I). However, a plan administrator or an IRA trustee may not rely on the self-certification for other purposes or if the plan administrator or IRA trustee has actual knowledge that is contrary to the self-certification.
(2) Effect on taxpayer. A self-certification is not a waiver by the IRS of the 60-day rollover requirement. However, a taxpayer may report the contribution as a valid rollover unless later informed otherwise by the IRS. The IRS, in the course of an examination, may consider whether a taxpayer’s contribution meets the requirements for a waiver. For example, the IRS may determine that the requirements for a waiver were not met because of a material misstatement in the self-certification, the reason or reasons claimed by the taxpayer for missing the 60-day deadline did not prevent the taxpayer from completing the rollover within 60 days following receipt, or the taxpayer failed to make the contribution as soon as practicable after the reason or reasons no longer prevented the taxpayer from making the contribution. In such a case, the taxpayer may be subject to additions to income and penalties, such as the penalty for failure to pay the proper amount of tax under Section 6651.
The new self-certification procedure for waivers of the 60-day requirement for rollovers will provide some relief for taxpayers from the cost and time burdens previously incident to requesting an extension of the 60-day period. However, the IRA owner still maintains the burden of proof that he or she qualifies for the waiver upon audit. This continues to drive home the point that IRA owners may be best served by completing direct rollovers when moving assets to IRAs from qualified retirement plans, and using the transfer method when moving assets between like IRAs.
There will be necessary changes to certain IRA forms, tax-reporting software, and trustee policies and procedures. The ramifications of this new procedure will require updated training to IRA personnel, as well as communication between interested parties at financial organizations.