Earlier this year the IRS issued Announcement 2014-15 regarding a significant change in its long-standing interpretation of its one-per-year limit on IRA rollovers. A reference to this announcement was first reported on this forum by “TaxGuyBill” on March 21, 2014, but his post was one of several replies on a routine thread about an IRA rollover, so it’s possible that many visitors here may not have seen his post or read the same information elsewhere. The IRS’s new view on the subject of IRA rollovers represents a major departure from its previous position on the matter, including its own written guidance in Pub 590. The new rule, which IRS says it will enforce starting in 2015, is so important to so many taxpayers ... virtually everyone who has an IRA ... that it is vital for every tax professional to be aware of it.
Previously, taxpayers whose IRA funds were divided among several trustees and/or accounts could take a distribution out of one account and, within 60-days, roll it over into one of their other IRA funds (or back into the same account from which it came), and the distribution would not be taxable. The only restriction was that the same accounts could not be used more than once in any “rolling” one-year period. (This rule is paraphrased here for simplicity.) The new rule, which arose as an unexpected, surprise outcome from a court case decided in January 2014, now limits a taxpayer to one tax-free 60-day distribution/rollover in any 12-month period, regardless of how many different accounts his IRA funds are divided among.
The IRS recognized that immediate enforcement of this new interpretation could serve as a hardship for some taxpayers, so it decided to delay the enforcement start date until 2015. Thus, multiple distributions that are received and rolled over in 2014 will be safe from the new rule, as long as they don’t violate the old one-per-account-per-year rule. The “old” rule will also protect distributions received in November or December 2014 and rolled over in January or February 2015, within the 60-days allowed, because the IRS stated in Announcement 2014-15 that its former interpretation would apply to any rollover that involves an IRA distribution occurring before January 1, 2015. (Emphasis added.)
Over the years many of my clients have made two or more distribution/rollover transactions in a single year, and each year I prepare returns for several taxpayers who I discover did that in the year just ended. The trouble is I usually don’t know about their rollover activity until I receive their tax information and see their 1099-R forms. Most taxpayers know about rollovers and the 60-day time period. Very few of them, however, know about the new one-rollover-per-year rule ... and won’t know about it until we tell them! I plan to send a letter ... via e-mail or snail mail ... to each of my clients who has an IRA, regardless of the client’s age, and I urge everyone reading this to consider doing the same.
A violation of the new rule could be punishingly expensive. If noticed by the IRS, an excess rollover would be disallowed, resulting in the distribution being fully taxable (except for any portion with basis). If done by a taxpayer under 59½ years of age, it would also be subject to the 10% §72(t) penalty. On top of that the additional tax would be subject to the usual late-payment penalties and interest as well as the “accuracy-related” penalty and perhaps even the “substantial understatement” penalty. As if that's not bad enough, an "ineligible-for-rollover" distribution that's rolled over anyway will become an "excess contribution" into it's new parking place, subjecting the IRA owner to the 6% "excise tax" penalty for that. I’m sure none of us wants any of our clients (or ourselves, for that matter) to naively run afoul of the new rollover limit and be punished for it so harshly and unexpectedly.
Fortunately, the new rule ... it’s really a new interpretation of an old rule: Code §408(d)(3)(B) ... does not apply to direct, “trustee-to-trustee” transfers, as those are not defined as “rollovers.” Nor does it apply to rollovers from an IRA to a Roth IRA ... i.e. conversions ... or to rollovers from an IRA to a 401(k) plan or vice-versa.
IRS Announcement 2014-15 may be read here: http://www.irs.gov/pub/irs-drop/a-14-15.pdf
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You may be wondering, “How did this new interpretation come about?” The IRS was following its own long-standing, published, taxpayer-friendly rule; no taxpayer would have sought to make this change; and no court would dictate this change in interpretation on its own initiative. So how did it happen?
There was a case in tax court brought by a tax attorney, Alvan L. Bobrow, and his wife Elisa S. Bobrow, contesting an IRS tax deficiency resulting from the IRS’s disallowance of IRA distributions that the IRS asserted were not rolled over in time ... i.e. within the 60 days allowed. There were three separate IRA accounts involved, and three distributions and rollovers, all for the same amounts ... a little over $64,000 each. The IRS was not challenging the once-per-year rule, because the taxpayers had taken the amounts out of and rolled the same amounts into different accounts which, apparently, the IRS didn’t think was an issue. The IRS’s issue was with the timing of the distributions and subsequent rollovers. The court, however, looked into not only the timing but the number of distribution/rollover transactions and, without being asked to do so, ruled that the multiple rollovers violated IRC §408(d)(3)(B), which the court concluded limited a taxpayer to one rollover in any 12-month period, regardless of the number of different accounts in which his IRA funds were invested. The decision was filed on January 28, 2014, and the IRS must have thought Christmas had arrived eleven months early this year. Shortly thereafter it announced that it would start to apply the tax court’s interpretation beginning in 2015, and that it would revise Pub 590 accordingly. It also announced that it would withdraw a proposed regulation on the subject, Proposed Regulation §1.408-4(b)(4)(ii), and presumably, it will issue a new conforming Reg.
The Tax Court’s opinion may be read in its entirety here:
Previously, taxpayers whose IRA funds were divided among several trustees and/or accounts could take a distribution out of one account and, within 60-days, roll it over into one of their other IRA funds (or back into the same account from which it came), and the distribution would not be taxable. The only restriction was that the same accounts could not be used more than once in any “rolling” one-year period. (This rule is paraphrased here for simplicity.) The new rule, which arose as an unexpected, surprise outcome from a court case decided in January 2014, now limits a taxpayer to one tax-free 60-day distribution/rollover in any 12-month period, regardless of how many different accounts his IRA funds are divided among.
The IRS recognized that immediate enforcement of this new interpretation could serve as a hardship for some taxpayers, so it decided to delay the enforcement start date until 2015. Thus, multiple distributions that are received and rolled over in 2014 will be safe from the new rule, as long as they don’t violate the old one-per-account-per-year rule. The “old” rule will also protect distributions received in November or December 2014 and rolled over in January or February 2015, within the 60-days allowed, because the IRS stated in Announcement 2014-15 that its former interpretation would apply to any rollover that involves an IRA distribution occurring before January 1, 2015. (Emphasis added.)
Over the years many of my clients have made two or more distribution/rollover transactions in a single year, and each year I prepare returns for several taxpayers who I discover did that in the year just ended. The trouble is I usually don’t know about their rollover activity until I receive their tax information and see their 1099-R forms. Most taxpayers know about rollovers and the 60-day time period. Very few of them, however, know about the new one-rollover-per-year rule ... and won’t know about it until we tell them! I plan to send a letter ... via e-mail or snail mail ... to each of my clients who has an IRA, regardless of the client’s age, and I urge everyone reading this to consider doing the same.
A violation of the new rule could be punishingly expensive. If noticed by the IRS, an excess rollover would be disallowed, resulting in the distribution being fully taxable (except for any portion with basis). If done by a taxpayer under 59½ years of age, it would also be subject to the 10% §72(t) penalty. On top of that the additional tax would be subject to the usual late-payment penalties and interest as well as the “accuracy-related” penalty and perhaps even the “substantial understatement” penalty. As if that's not bad enough, an "ineligible-for-rollover" distribution that's rolled over anyway will become an "excess contribution" into it's new parking place, subjecting the IRA owner to the 6% "excise tax" penalty for that. I’m sure none of us wants any of our clients (or ourselves, for that matter) to naively run afoul of the new rollover limit and be punished for it so harshly and unexpectedly.
Fortunately, the new rule ... it’s really a new interpretation of an old rule: Code §408(d)(3)(B) ... does not apply to direct, “trustee-to-trustee” transfers, as those are not defined as “rollovers.” Nor does it apply to rollovers from an IRA to a Roth IRA ... i.e. conversions ... or to rollovers from an IRA to a 401(k) plan or vice-versa.
IRS Announcement 2014-15 may be read here: http://www.irs.gov/pub/irs-drop/a-14-15.pdf
* * * * * * * * * * * * * * * * * * * * * * * * * * * *
You may be wondering, “How did this new interpretation come about?” The IRS was following its own long-standing, published, taxpayer-friendly rule; no taxpayer would have sought to make this change; and no court would dictate this change in interpretation on its own initiative. So how did it happen?
There was a case in tax court brought by a tax attorney, Alvan L. Bobrow, and his wife Elisa S. Bobrow, contesting an IRS tax deficiency resulting from the IRS’s disallowance of IRA distributions that the IRS asserted were not rolled over in time ... i.e. within the 60 days allowed. There were three separate IRA accounts involved, and three distributions and rollovers, all for the same amounts ... a little over $64,000 each. The IRS was not challenging the once-per-year rule, because the taxpayers had taken the amounts out of and rolled the same amounts into different accounts which, apparently, the IRS didn’t think was an issue. The IRS’s issue was with the timing of the distributions and subsequent rollovers. The court, however, looked into not only the timing but the number of distribution/rollover transactions and, without being asked to do so, ruled that the multiple rollovers violated IRC §408(d)(3)(B), which the court concluded limited a taxpayer to one rollover in any 12-month period, regardless of the number of different accounts in which his IRA funds were invested. The decision was filed on January 28, 2014, and the IRS must have thought Christmas had arrived eleven months early this year. Shortly thereafter it announced that it would start to apply the tax court’s interpretation beginning in 2015, and that it would revise Pub 590 accordingly. It also announced that it would withdraw a proposed regulation on the subject, Proposed Regulation §1.408-4(b)(4)(ii), and presumably, it will issue a new conforming Reg.
The Tax Court’s opinion may be read in its entirety here:
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