Indirect IRA Rollover Error | Ed Slott and Company, LLC

Indirect IRA Rollover Error

A relative informed me that in 2007 she inadvertently violated the one indirect IRA transfer per year rule. On multiple occassions during 2007, she withdrew funds from a single IRA account at a brokerage and immediately deposited the funds into rollover IRA CDs at banks. She was only aware of the 60 day rule, and not the once per year rule for indirect transfers. It is clear from the timelines and facts that the only intent was to transfer the funds to a new custodian and not to "borrow" the funds (rollover IRA CDs were all opened within 5 days of receiving the distributions). Although technically a violation of the rule, it is clear the intent was to do a tax-free rollovers. If she were to report these distributions as nontaxable on her return, what are the odds that they will be detected as a violation given the fact the banks will report a matching incoming rollover? Is there any possibility she could go to the IRS now, explain what happened, and obtain their forgiveness due to ignorance of the rule?

She would need to seek a PLR, and I am not aware of any that deal with the 12 month limitation. However, if the amount of funds dictates, it may be worth it since there was no intent to use the funds in any way except to change IRA custodians. It would have been nice had the bank tipped her off to the 12 month rule. The actual reporting mechanism would not usually result in disclosure of this infraction, but in this case, she probably has a different IRA account for each CD, so a separate 5498 will be issued for each rollover contribution, a real red flag when there is only one 1099R for the distribution. She may have some opportunity under the 60 day rule to select the one rollover permitted. The others would be excess contributions that would need to be corrected in the usual manner.

Thanks Alan. I have a follow-up question if you don't mind. Wouldn't the red flag actually be the multiple 1099Rs issued by the brokerage firm indicating multiple distributions from a single IRA account, as opposed to the multiple 5498s issued by the recipient banks? If she requests a PLR (which I believe costs $9000), is there a reasonable chance that the IRS would grant relief based on verifiable taxpayer intent and ignorance of the law?

I believe that the IRS only charges $500 for a PLR related to IRA rollover activities for amounts under $50,000. 1,500 for amounts 50-100,000 and 3,000 for amounts over 100,000. This is definitely true for 60 day rollover requests, but I believe it applies to other IRA rollover issues as well. The 9,000 fee is for "all other" IRA matters including 72t requests. Of course, you have to add the drafting fee of the tax pro to the IRS fee. With respect to the 1099R, most brokerage firms will only issue one 1099R per IRA account, and it would total the annual distribution amounts. So would the 5498, except that with CDs, each one was probably a separate IRA account number. So the IRS would see that the distributions all came from one account. The multiple 5498 forms only shows that separate accounts were opened, but not if they were funded by different distributions or not. As such, I'll back off the red flag comment and revise it to something that might only carry a slightly increased chance of inquiry.

Sounds like she had several roll overs, but not several follovers of the same funds.. is this a different thing? people routinely go from one IRA to another especially in the banking world. Are the rules on rollover per year, or one rollover of the same funds per year. For instance. 200k in a brokerage... Rollover 50k 4 times a year, just not the same 50k. AM I wrong?

Yes, that is wrong. The 12 month rollover restriction applies on a per account basis irrespective of the investments in the distribution account or in the rollover account. In this case each distribution from IRA #1 resulted in a rollover from that IRA, and you are only allowed one per 12 month period. The separate 50,000 rollovers per your example are not allowed, only the first one is OK. However, if 200,000 was withdrawn at one time and split 50,000 each into 4 different IRAs, that's OK as it constitutes only one rollover.

You are correct in that there were multiple indirect transfers out of a single IRA, but in no case was the same money moved more than once. Unfortunately, the rule prohibits multiple transfers out of a single IRA even if it is not the same money being moved. For example, if you have $400,000 in an IRA, indirectly transfer $200,000 to one bank, and the next day indirectly $200,000 to a different bank (in order to stay within the FDIC insurance limits), the second $200,000 is a violation on which you have to pay over $100,000 of taxes and penalties. She clearly intended to just move the money and not "borrow" it, since each transfer was completed within 5 days. Even so, she may end-up losing half of her IRA savings to the IRS because of her ignorance of this rule (a rule that is much less publicized than the 60 day rule that most people are aware of). She does not meet any of the specific exceptions provided for in the law. Does the IRS have the power to waive a rule like this based on proven intent and fairness to the taxpayer? Alan had previously suggested requesting a letter ruling. Has anyone out there ever seen a successful letter ruling in a case like this?

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