Answers to advisers’ top questions on IRS’ late IRA rollover relief

On Aug. 24, the Internal Revenue Service issued Revenue Procedure 2016-47, providing immediate relief for most late 60-day rollovers.

Here are questions advisers are asking about the new rules:

Question: Can the self-certification procedure be used for distributions from both company plans and IRAs?

Answer: Yes. The new procedures can be used by clients to roll over distributions from both from company plans and IRAs.

Q: How does my client report a rollover using the new self-certification procedure on her tax return?

A: Your client will report the transaction as a rollover, in the same manner that they would report any other rollover. No special reporting is necessary on their federal tax return. However, the IRS is planning to modify the instructions to Form 5498 to require that an IRA trustee or custodian, who accepts a late rollover with a self-certification, report that it was accepted after the deadline. Your client should be aware that with this new reporting requirement, the IRS will know which rollovers were late and, therefore, can apply a higher level of scrutiny.

(More: IRS more lenient on 60-day rollover)

Q: Is the client required to file the self-certification letter with the IRS?

A: No. There is no requirement that the client file anything with the IRS when using the self-certification procedure. The letter will need to be provided to the IRA custodian or the plan administrator. The IRS also recommends keeping a copy of the certification in the client’s files in case it is requested during an audit.

Q: Is a financial organization required to accept the client’s self-certification?

A: No. A custodian may refuse to accept a late rollover to an IRA if they so choose. However, while some custodians may choose to do so, Revenue Procedure 2016-47 explicitly says that custodians may rely on a client’s self-certification statement to accept late rollovers as long as they don’t have direct knowledge that runs counter to the IRA owner’s claim. As such, accepting a late rollover will result in minimal liability on the part of a custodian.

Q: Is there a fee for self-certification?

A: No. There is no fee that needs to be paid to the IRS. This is a huge savings for clients looking for 60-day rollover relief. Previously, the only way to get such relief was through the private letter ruling (PLR) process which came with a hefty price tag, plus the cost of preparation.

(More: Will the state take your client’s IRA? It can)

Q: My client violated the once-per-year rollover rule. Will the new self-certification rules help him?

A: No. Self-certification will not help with this mistake. The IRS cannot allow a client to self-certify a late rollover when a timely rollover would not have been allowed in the first place.

Q: Can IRS disallow the self-certification?

A: Absolutely. Completing a late rollover using the self-certification process is not the same as a waiver that the IRS could grant via a PLR. When a client is able to obtain a successful PLR request, the IRS has essentially “blessed” their transaction as OK. Any disputes with an IRS representative regarding the matter that later come up can be easily resolved by providing a copy of the successful PLR.

(More: RMDs can create future tax savings)

If, on the other hand, a client uses the self-certification process to complete a late rollover, it’s possible that the IRS, upon examination of the client’s return, could decide that the client did not meet the requirements of Revenue Procedure 2016-47. Thus, the only sure way for clients to complete a late rollover with a 100% guarantee of the IRS’ acceptance is to obtain a PLR. Given the substantial expense of a PLR, coupled with the small likelihood of an IRS overrule of a self-certified late rollover, it is hard to imagine many people opting for the PLR route.

Once again, advisers can avoid all of these 60-day rollover issues by using only direct trustee to trustee transfers whenever possible.

Ed Slott, a certified public accountant, created the IRA Leadership Program and Ed Slott’s Elite IRA Advisor Group. He can be reached at irahelp.com.