The Internal Revenue Service (IRS) now requires separate reporting of any late rollover contributions self-certified by an individual retirement account (IRA) owner on Form 5498, IRA Contribution Information.
The new requirement is effective on the 2017 Form 5498, which is due to the IRA owner and the IRS by May 31, 2018.
Reporting late rollover contributions
Under the new reporting requirement, late rollover contributions must now be reported separately from timely rollover contributions. The amount of a late rollover contribution made in 2017 and self-certified by the IRA owner is reported on Form 5498 in Box 13a, postponed contribution; Box 13b, year, is left blank; and reason code “SC” is entered in Box 13c, code.
A separate Form 5498 must be issued to report the late rollover contribution if the IRA owner also made a postponed contribution because:
Timely rollover contributions continue to be reported on Form 5498 in Box 2, rollover contributions.
Simplified waiver process
Under the tax law, a distribution from an IRA or employer-sponsored retirement plan qualifies for tax-free rollover treatment if it is contributed to another IRA or employer-sponsored retirement plan within 60 days of receipt.
If the deadline is missed, the distribution is taxable, and may be subject to an additional 10% penalty.
For as long as IRAs have existed, IRA owners have been missing the 60-day deadline, and for years, the IRS took the position that it lacked authority to waive the deadline.
That changed in 2001 when Congress gave the IRS authority to waive the 60-day deadline where the failure to do so “would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.”
In 2003, the IRS issued Revenue Procedure 2003-16 that outlined the process for applying for a waiver of the 60-day deadline and provided instances where an automatic waiver of the deadline is available.
Unless taxpayers are eligible for an automatic waiver, they must apply for a waiver using the same procedure used for IRS private letter rulings. A private letter ruling is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer’s specific set of facts.
The procedures and user fees for obtaining a letter ruling are published annually in the first revenue procedure published each calendar year.
Over the years, thousands of taxpayers applied to the IRS for private letter rulings and many—but not all—were granted waivers.
In 2016, the IRS increased the user fee for private letter rulings to $10,000, making the option impractical except in the case of very large distribution amounts.
Under Revenue Procedure 2016-47, in lieu of obtaining a private letter ruling, taxpayers may self-certify that they qualify for a waiver of the 60-day rollover requirement, using the IRS model certification letter in the revenue procedure, or a letter that is substantially similar to the IRS model.
Taxpayers may self-certify only if:
The revenue procedure provides taxpayers with a 30-day safe harbor to meet the “as soon as practicable” requirement.
For purposes of self-certification, the revenue procedure lists the following reasons for missing the deadline:
Revenue Procedure 2016-47 benefits credit unions offering IRAs to their members because of its safe harbor provision.
As an IRA trustee or custodian, credit unions can rely on the IRA owner’s self-certification that they have met the conditions for a waiver of the 60-day rollover requirement, unless the credit union has actual knowledge contrary to the self-certification.
It also benefits credit union members who miss the 60-day rollover deadline and would not be able to afford the cost of requesting a private letter ruling.
That said, it is important for taxpayers to understand that self-certification is not a waiver by the IRS of the 60-day rollover requirement. A taxpayer may report the contribution as a valid rollover unless the IRS says otherwise.
If in the course of an examination, the IRS determines that the requirements for a waiver were not met, the taxpayer may be subject to additional taxes and penalties.
Credit unions would be well-advised to recommend to members who miss the 60-day rollover deadline to seek competent tax advice to determine the options available to them.
In some cases, requesting a private letter ruling may be a better option, as it provides certainty as to the tax treatment of the transaction. If the taxpayer does not qualify for an automatic waiver or self-certification, it is the only option.
If an IRA owner chooses to self-certify a late rollover, it is essential that the requirements for a waiver are met, and documentation is maintained to substantiate the IRA owner’s position, in case the IRS challenges the transaction.
This is especially true in light of the separate reporting requirements that send a not-too-subtle signal that the IRS intends to carefully monitor these transactions.