Track dates to save clients from new, big IRS fees

The IRS has increased its fees to request private-letter rulings (PLRs) for extensions upon missing two common retirement deadlines: 60-day rollovers and Roth recharacterizations.

Effective Feb. 1, 2016, fees for requesting PLRs to extend the deadlines jump to $10,000 per request. These are serious increases: Before, the 60-day fee was on a sliding scale from $500 to $3,000, depending on the the rollover amount; the late Roth recharacterization fee was $4,000.

Remember, this is only the IRS PLR fee. Professional fees to prepare the ruling requests add $10,000 or more, depending on the complexity of the situation. Furthermore, there is no guarantee the IRS will grant the request. They are frequently denied, putting your client back where he or she started, less the PLR money.

WHAT TO DO?

Advisers should make more effort to alert clients to the deadlines and help them track them. Know which clients converted to a Roth IRA in 2015 and make sure they are aware of the Oct. 15 recharacterization deadline. Remind them in September.

60-DAY ROLLOVERS

For 60-day rollovers, alert them to their deadline, which depends on when they took their distribution.

These problems can be avoided altogether by not doing 60-day rollovers. Educate clients to move IRA and plan funds only as direct (trustee-to-trustee) transfers. Direct transfers are not subject to the 60-day rule, so there won’t be a problem, unless, of course, the direct rollover is done to the wrong account, such as a non-IRA.

Sixty-day rollovers occur when funds are withdrawn from the IRA or plan and the check is made out to the employee or IRA owner personally. Since that check can be cashed, that is an indirect (60-day rollover) transfer. Instead, move the funds directly or, if a check is made out, make it out to the receiving account instead of to the client personally. That will qualify as a direct transfer, eliminating the 60-day problem.

In addition, if the rollover is an IRA-to-IRA or Roth IRA-to-Roth IRA, then only one 60-day rollover can be done from the entire group of a client’s IRAs and Roth IRAs per year (365 days, not a calendar year). This stricter interpretation of the once-per-year IRA rollover rule has been in effect since the beginning of 2015.

If after all of that, your client still does a 60-day rollover, make sure the funds are eligible to be rolled over and it is completed within 60 days from the date the funds were received. It’s 60 calendar days, not 60 business days. Certain distributions are not eligible to be rolled over, such as required minimum distributions; those to non-spouse beneficiaries; or IRA funds where a client has already done a 60-day rollover from any other IRA or Roth IRA within the last 12 months.

If the funds are eligible to be rolled over and the 60-day window is missed, a PLR can be requested and the IRS can allow more time to complete the rollover. But now the PLR fees are a much heavier.

The IRS will generally only grant the ruling request if there was a true intent to do a rollover but the 60-day deadline was missed due to incorrect advice from an adviser or financial institution (and they are willing to admit that in the PLR request); or if there was a medical problem; or a death. The IRS will generally deny the ruling request if the funds that were out of the IRA were used in the interim, for example, for a short-term loan to buy a home or pay bills. The IRS will also deny the ruling request if the funds were withdrawn for tax planning or to get a better rate by changing investments.

LATE ROTH REVERSALS

One of the best tax planning tools available in the tax code is the ability to reverse a Roth IRA conversion, after the fact. The reversal, a Roth recharacterization, can be done up to Oct. 15 of the year following the year of the conversion. For example, the deadline to undo a 2015 Roth conversion is Oct. 15, 2016. But if that deadline is missed, the only way to extend it is to request a PLR from the IRS.

The IRS generally will only allow the extension for poor financial advice, medical reasons or a blatant, obvious error, and it is solely up to the IRS. For example, the IRS will not allow a late Roth recharacterization after the deadline because the account value declined.

Alert all your clients to these deadlines, since the cost to even try to fix these problems later has now become prohibitive.

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.