IRS Simplifies Process for Avoiding Rollover Penalties

Abstract: The IRS has made it a lot simpler for retirement plan participants’ including IRA owners’ to avoid penalties when they screw up a rollover. This brief article discusses new IRS Revenue Procedure 2016-47, which allows participants to “self-confirm” the valid reasons in a formal statement to the receiving financial institution.

The IRS has made it a lot simpler for retirement plan participants’ including IRA owners’ to avoid penalties when they screw up a rollover. Plan sponsors encourage 401(k) plan participants to request a direct trustee-to-trustee transfer or direct rollover in order to avoid a 20% mandatory tax withholding. Participants, who at times are impatient, ask to have their account balances distributed directly to them causing them to pay this tax.

If a participant does have their balance distributed directly to them, they then have 60 days from the date he or she receives an IRA or retirement plan distribution to roll it over to another plan or IRA. Otherwise, the participant may have to pay an additional 10% tax penalty on top of being taxed the mandatory 20% on the distribution’s full amount.

Previously, account holders faced a difficult task to persuade the IRS that they’d made an honest mistake withdrawing the account balance. New IRS Revenue Procedure 2016-47 allows participants to “self-confirm” the valid reasons in a formal statement to the receiving financial institution. The guidance also furnishes a model letter for taxpayers and describes various situations in which participants can avoid the penalty, including the following:

· An error was committed by the financial institution receiving the contribution or making the distribution.

· The distribution check was misplaced, stolen or never cashed by the taxpayer.

· The taxpayer deposited the distribution into an account that he or she mistakenly thought was an eligible retirement plan.

· The taxpayer’s principal residence was severely damaged or broken into.

· A death of a member of the taxpayer’s family, or a serious illness of the taxpayer or a member of the taxpayer’s family.

· Incarceration of the taxpayer.

· Restrictions imposed by a foreign country.

· An error was committed on behalf of the post office (carrier service).

· The distribution was made because of a levy and the proceeds were returned to the taxpayer.

Finally, the taxpayer can confirm that, despite his or her reasonable efforts to obtain the information, the party making the rollover distribution was delayed in providing information that the receiving plan or IRA needed to complete the rollover.

© 2017

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