Concerned About IRA Rollover Mistakes? New IRS Rule May Offer Tax Penalty Relief
Decades in the past, individuals did not necessarily have to fret over retirement as Social Security benefits and pensions earned over decades of working were typically sufficient for retirement. As the decades continued on, employers began to shift responsibility for employment savings to individuals in the form of 401(k) plans and other retirement investment vehicles. Shifting responsibility for retirement savings to the individual also shifted responsibility for certain tax reporting and handling of retirement savings. For many taxpayers, these complex matters can result in serious tax mistakes that can result in penalties and other serious tax and financial consequences.
However, new rules recently announced by the IRS regarding IRA rollovers should be welcome for taxpayers. The new rules set forth certain exceptions to rules that otherwise set strict depository time frames for IRA rollovers. The Sacramento tax lawyers of Newpoint Law Group, LLP, can provide tax guidance regarding IRA rollovers. If you fear that you have already made a mistake or the IRS has already assessed penalties, we can work to determine if you may qualify for relief.
IRS 60-Day Rule Often Resulted in Harsh Tax Consequences for IRA Rollovers
For any individual who has received a rollover from a retirement plan and then procrastinated, the harsh application of the 60-day rule is probably not a surprise. Under the rule, a taxpayer has 60 days to reinvest the money into another employer’s retirement plan or into an IRA. If you failed to deposit the money in a qualifying account by that time, the IRS presumes that you have had use of the money resulting in the imposition of an income tax on the funds. For individuals who have not yet reached the age of 59.5 years, an additional 10 percent penalty applies.
New IRS Revenue Procedure Can Provide IRA Penalty Relief
In IRS Revenue Procedure 2016-47, the agency announced that it would provide relief for IRA mistakes provided that the taxpayer meets certain mitigating circumstances. The mitigating circumstances that can provide a taxpayer relief include:
- You were unable to take timely action because your home or principle residence was destroyed.
- You encountered delays due to a death or serious illness of a family member.
- An error by a financial institution was the cause of the delay.
- The distribution was paid by a check and the check was never deposited.
- The postal service or courier responsible for delivering the rollover made an error.
- The distribution did not actually come from an IRA.
There are other scenarios where penalties and consequences of an untimely IRA distribution can be mitigated, but this covers many of the more common scenarios. It is imperative to note that this is not a blanket authorization to delay deposit of the funds indefinitely. A 30-day safe harbor applies that requires the contribution to be made as soon as practicable. The 30-day window begins running when the condition or event that was cited in the need for relief has ceased.
In addition, taxpayers who seek this relief are required to self-certify the reason behind their violation of the 60-day period to deposit the rollover. Administrators may not accept a certification if they know it to be false or in contradiction of known facts. Furthermore, is the IRS decides to audit or engage in an examination of the taxpayer, the agency may “may consider whether a taxpayer’s contribution meets the requirements for a waiver.” If the IRS determines the relief was obtained through a materially false statement, the agency reserves the right to impose additional penalties. An example provided in the Revenue Procedure states that “the penalty for failure to pay the proper amount of tax under § 6651” can be imposed and leaves the door open for any other applicable penalties. Therefore, taxpayers must move cautiously when applying for relief of this type.
Work with Strategic Sacramento Tax Lawyer
If you are facing serious potential tax penalties and other financial consequences due to an error with an IRA or other tax obligations, the lawyers of NewPoint Law Group may be able to help. To schedule a confidential consultation with meticulous and strategic tax attorney, call 1-800-358-0305 today. We have law offices conveniently located in the Sacramento-area in Folsom and Roseville, California.