IRS Ignores Its Own Rollover Rules, Wins Court Case

You know that there are two ways to do a tax-free IRA rollover. One way is trustee-to-trustee, in which you never touch the money; one IRA custodian transfers money to another. The other way is the 60-day rollover. You receive money from the IRA and within 60 days deposit that same amount either in the original IRA or in a different IRA.

The 60-day rollover is allowed only once annually. IRS Publication 590 and proposed regulations that were issued years ago but never finalized both say the one-year limit applies separately to each IRA. But after auditing a taxpayer recently, the IRS changed its mind and argued in court for a different rule.

In the case, the taxpayer (a tax lawyer at a large law firm) took $65,000 from one of his IRAs. Before the 60-day deadline he took the same amount from a second IRA he had at the same mutual fund firm, deposited it in his checking account at the firm, and then transferred it to the first IRA. Then, his wife took the same amount from her IRA, put it in their joint checking account, and transferred it to the husband’s second IRA. Later, the couple put money from their joint account into the wife’s IRA (though that deposit was a day later than the 60-day deadline).

The IRS argued in the Tax Court that the one 60-day rollover limit per year should apply to each taxpayer, not to each IRA. The Tax Court agreed, saying IRS publications and proposed regulations can’t be relied on by taxpayers as settled law.

After winning the Tax Court case, the IRS issued a notice saying that the 60-day rollover rule will be allowed only once per taxpayer per year, beginning with distributions occurring on or after January 1, 2015.

The 60-day rollover always has been a risky way to secure a short-term loan or to change IRA custodians. A lot can go wrong. You can get sick or count the days wrong. Or an IRA custodian can make a mistake. It’s better to use a trustee-to-trustee transfer to move money between IRAs. Try other sources for short-term loans. The new IRS rule makes the trustee-to-trustee transfer even better advice than before.

(Bobrow v. Commissioner, T.C. Memo 2014-21; Notice 2014-15)

RW June 2014.