IRA Rollovers - One Rollover Per Year Means One Rollover Per Year

William Delaney

(Not one rollover per year from each IRA)

Written by William Delaney, EA, ATA of Westwood, MA 

What happens if a client owns two IRA accounts, requests a distribution from account A and subsequently makes a rollover deposit to new account C within the 60 days allowed for a tax-free rollover?  Nothing happens.  He is allowed one per year.  See IRC 408(d)(3)(B) and Private Letter Ruling 8731041 (5/8/87).

What happens if the client also requests a distribution from account B and subsequently makes a rollover deposit to new account D, again within the 60 day time period?  Again, nothing happens because the IRS letter ruling says that a taxpayer is limited to one from each IRA owned.

Now comes the U.S. Tax Court in Alvan L. Bobrow, et ux. V. Comm., T.C,. Memo 2014-21.  It is a rather complicated case which is not surprising since Mr. Bobrow is an attorney specializing in taxation.  The issue with which we concern ourselves is the distribution and subsequent rollover from account B to account D which occurred in the same twelve month period as the distribution and subsequent rollover from account A to account C.  Are both OK, since there was only one rollover from each account, or is the second rollover in the same twelve month period fatal?

 “Petitioners [in Bobrow] assert that the Section 4008(d)(3)(B) limitation is specific to each IRA maintained by a taxpayer and does not apply across all of a taxpayer’s IRAs…Petitioners do not cite any supporting case law or statutes that would support their position.”

 The Court opined, however, that “The plain language of Section 408(b)(3)(B) limits the frequency with which a taxpayer may elect to make a nontaxable rollover contribution.  By its terms, the one-year limitation…is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer.”  “Congress added the…limitation as a way to ensure that taxpayers did not take advantage of Section 408(d)(3)(A) to repeatedly shift nontaxable income in and out of retirement accounts.  See e.g. H.R. Rept. No. 93-779 at 139 (1974), 1974-3 C.B. 244, 381 (“To prevent too much shifting of investments….the bill provides that an individual can transfer amounts between individual retirement accounts only once every three years’( [note:  amended to one year in 1978].

 But, all is not lost.  See footnote 5 to the decision:

“Taxpayers who maintain more than one IRA may make multiple direct rollovers from the trustee of one IRA to the trustee of another IRA without triggering the Sec. 408(d)(3)(B) limitation. See Rev. Rul. 78-406…Transferring funds directly between trustees does not result in a “distribution” within the meaning of sec. 408(d)(3)(A).  Since such funds are not within the direct control and use of the participant, they are not considered to be ‘rollover contributions’.”

So, the moral of the story is quite simple.  Use direct rollovers and never, ever take a direct distribution with the intent to roll it over within the 60 day time period allowed.  The Bobrow taxpayers also missed meeting that requirement!

NATP Special Alert - Appeals Court Strikes Down IRS Return Preparer Program

Loving Case Update

The United States Court of Appeals for the District of Columbia Circuit issued their opinion on the Loving case and affirms the judgment of the District Court. Therefore, the IRS is enjoined from enforcing its licensing, testing and continuing education regime for tax preparers who are not otherwise regulated.

The court case questioned whether it is in the IRS’s statutory authority to “regulate the practice of representatives of persons before the Department of the Treasury.” The District Court ruled against the IRS, relying on the text, history, structure and context of the statute. The Appeals Court agrees with the District Court that the IRS’s statutory authority under Section 330 cannot be stretched so broadly as to encompass authority to regulate tax return preparers.
The Appeals Court certifies that tax return preparers certainly assist the taxpayer, but they do not represent the taxpayer. In the decision, the Court stated, “In light of the way the Code treats tax preparation, it would be quite wrong to say that a tax-return preparer ‘represents’ the taxpayer in any meaningful legal sense.”

The Court concluded, “It might be that allowing the IRS to regulate tax-return preparers more stringently would be wise as a policy matter. But that is a decision for Congress and the President to make if they wish by enacting new legislation. The ‘role of this Court is to apply the statute as it is written – even if we think some other approach might accord with good policy.’”

What does this mean now? We’ll have to wait to see if the IRS moves forward with the program, how it treats the RTRP designation or if they contact Congress. In February 2013, the District Court clarified the injunction to note that the IRS was not required to completely shut down the RTRP program. The IRS just couldn’t require all tax professionals to partake in the program.


National Association of Tax Professionals (NATP)
PO Box 8002
Appleton, WI  54912-8002
800.558.3402
www.natptax.com

Regulation Posted on Historic Tax Credits

The Division of Taxation today posted, as final, a regulation about historic preservation tax credits. The regulation is intended to provide guidance to practitioners, developers, and others about the credit program.

Shortly after the program was established through legislation enacted in July 2013, the Division of Taxation posted an emergency regulation.

The final regulation will be effective on February 27, which is when the emergency regulation expires. Click here to view the final reg.

IRS Changes to Assistance and Taxpayer Services

Are you getting more calls from taxpayers with questions or needing tax preparation services?  This may be why.  The official title to the document is Some IRS Assistance and Taxpayer Services Shift to Automated Resources and was posted on irs.gov on December 20, 2013.  Just in case you missed it, here is a summary of these changes.

Beginning with this filing season IRS has made the following changes.  The introduction of the document says “The changes, which were made following input from stakeholders in the tax community, reflect the need for increased use of automated self-service options.  With limited resources to support person-to-person services on the phone or at Taxpayer Assistance Centers, the IRS is emphasizing services, such as those found on irs.gov, to help meet a number of taxpayer needs.  This approach will free up IRS assistors on the phone or in person to help with issues that cannot be resolved through other avenues, such as issues involving identity theft.”

TAX RETURN PREPARATION – Instead of assisting in the limited tax return preparation that IRS has done for years, IRS will now be directing qualified taxpayers to the nearest volunteer partner sites across the country such as the VITA program locations.

NEW “GET TRANSCRIPT” SERVICE – IRS has created a new online request option called “Get Transcript” on irs.gov which will allow individual taxpayers with an SSN to instantly view and print a copy of their tax transcripts.  It has transcripts for tax account, tax return, record of account, wage and income, and verification of non-filing.

TAX LAW ASSISTANCE – IRS states the majority of the questions it gets are about basic tax law issues, such as filing status, dependents, exemptions, and taxable income.  IRS will continue to answer these basic law questions during each filing season.  Taxpayers seeking help with other, more detailed tax law questions that frequently take more time to address will be referred to a number of other resources available on irs.gov, IRS tax publications, and the software packages taxpayers may already be using.  In other words it appears IRS is not going to answer any of these more complicated questions.  Watch for taxpayers to call your offices for help.

TAX REFUND INQUIRIES – IRS will refer inquiring taxpayers to the “Where’s My Tax Refund” tool on irs.gov, the automated telephone system, and the IRS2Go phone app.  IRS customer service will only be able to research refund status for returns that were efiled more than 20 days prior to the call OR paper filed more than six weeks prior to the call.

PRACTITIONER PRIORITY SERVICE – Apparently taxpayers have discovered the PPS phone number and are using it because IRS reports it has received many calls from taxpayers.  Now IRS will limit the PPS to tax professionals and requests related to resolving client related issues.  All other requests will be referred to “other appropriate resources for service.”

EMPLOYER IDENTIFICATION NUMBER – All EIN requests will now be referred to the EIN Online Assistant and refer only those with questions about a previously assigned EIN to a live IRS representative.