More on the Upcoming IRA Private Letter Ruling Fee Increases
By Jeffrey Levine, Dir. of Retirement Education
Follow Me on Twitter: @IRAGuru4EdSlott
What kind of nightmarish world would we be living in where gas today is $1.50 per gallon, but tomorrow it will cost you $30 for the same gallon. Or what would happen if today, your rent was $2,000 per month, but tomorrow your landlord told you he was increasing the monthly rent to $40,000 per month?
Thankfully, such increases are all but unheard of in the real world. At least that’s the case most of the time.
Effective February 1, 2016, the IRS is raising the cost of some IRA (and other retirement account) related private letter rulings (PLRs) to as much as 2,000% of their current cost... overnight! Here’s the deal.
If you’re not already aware, a PLR is a special way to get the IRS to “bless” a transaction you have already made, or are considering entering into, for tax purposes. It’s almost like a mini court case, where you go before the IRS and they determine how something would be treated.
For example, let’s suppose you had a great strategy that you thought could save you a substantial sum on your tax bill, but you weren’t 100% confident that the IRS would see things the same way. A PLR could tell you one way or the other. PLRs can also be used to request relief from a variety of mistakes, such as running afoul of the 60-day IRA rollover rule (but not the once-per-year rollover rule) and failing to recharacterize a Roth conversion in a timely manner.
If that sounds too good to be true, just remember that PLRs aren’t cheap. For many years, the standard IRS PLR fee has been $10,000, and that doesn’t include the professional fees you would normally incur to prepare such a ruling, which could easily run another $10,000 or more.
Thankfully, however, for many years the IRS has offered “bargain” PLR rates for certain requests; namely, requests for late 60-day rollovers and late recharacterization requests. For years, late recharacterization requests were “just” $4,000, while late 60-day rollover requests were as low as $500 in some cases. But all of that is going to change on February 1, 2016, when these bargain rates go away and the PLR fee for all IRA-related rulings becomes $10,000.
2016 Fee (Starting February 1)
% of Prior Year's Fee
Late Rollover $0 - $49,999
Late Rollover $50,000 - $99,999
Late Rollover $100,000+
Late Roth Recharacterization
All Other Rulings
IRA mistakes have always been costly, but with this change, the cost of many mistakes is going to be dramatically magnified. The massive increase in fees will make it a virtually certainty that such requests will now only be submitted by the wealthiest of IRA owners – who can not only afford to pay the high PLR fee, but whose mistakes involve large enough amounts that it’s actually worth seeking relief in the first place. No one, for instance, is going to pay a $10,000 IRS fee to try and avoid the income tax on an $18,000 distribution that wasn’t rolled over in time. It simply won’t be worth it.
There’s no doubt about it here. The little guy is getting squeezed. But don’t be so quick to blame the IRS. In truth, it’s probably not their fault. In recent years, the IRS’s budget has been slashed and its workforce has been dramatically scaled back. In all likelihood, they just simply don’t have the manpower to dedicate staff to working on rulings that only bring in $500 of revenue. Keep in mind that PLRs usually take many months to issue and often involve a significant amount of correspondence between the IRS and the person requesting the ruling (or the professional working on their behalf).
So what’s the big message here? DON’T MAKE A MISTAKE. Like my grandfather used to always tell me; measure twice and cut once. Do your research before you make any IRA moves. Be mindful of any deadlines. And of course, it’s always best to work with a knowledgeable professional who can help you steer clear of the mistakes that will now cost you (at least) $10,000 to fix.