We are all practically potty-trained to run everything we do by the experts. If we are asked to sign a contract, we have to run that by our expert attorney. If we want to understand the best business structure for tax purposes, we are told to check with our expert CPA (or another kind of attorney: the expert tax attorney). You get the idea: check, check and double-check with those in the know.
In addition to our stable of highly professional professionals, we also have other highly reputable “experts” we should be able to rely on to determine if we are doing the right thing. If we wanted to figure out what the tax implications and treatment should we want to rollover an IRA for instance, we might think the IRS would have the answers. Let’s even say that the IRS has spelled out exactly how this IRA rollover should happen, and you diligently follow the documentation and the advice given by the IRS to the letter. In this case, should we be able to rely on the agency that makes up the rules for the treatment of IRAs to give us sound, sage and legally accurate information?
Apparently not…
Yes, you read that right. According to one judge, the IRS is not an “expert” in the field of IRAs and how or when to roll them over.
Huh? Not an “expert”? If the IRS, the rules maker, is not an expert — then just who is?
The case brought before this judge surrounds a couple and their “rights” to withdraw funds from their IRA once per year, hold these funds for 60 days, redeposit these funds into qualified accounts without incurring taxes or penalties. The couple in this case relied on a publication produced by the IRS, Publication 590, Individual Retirement Arrangements (IRAs), as their basis for determining the legality of this action. Simplifying the case quite a bit, here’s what we know:
The husband (a tax attorney himself) had two qualifying IRAs — one traditional, and one rollover. He withdrew about $65,000 from each IRA within 3 months of each other. The husband did repay these amounts within the 60 days as stipulated by the law. That’s not the real issue. The real issue is that he took each of these distributions within 3 months of each other.
Part of the regulation regarding these distributions seems to say that you may not take a distribution like this more than once in a 12 month period. You remember the husband took two distributions within 3 months of each other. The court says that both of the husband’s IRAs are to be considered together when deciding if he has violated the 12 month limitation. The husband says that the 12 month limitation applies to each IRA individually and he did not violate the 12 month limitation for each of his IRAs individually.
The judge ruled against the couple and the couple became liable for taxes and penalties. In arguing before the court, the couple presented Publication 590. The court used case law to back up its decision. The couple had no case law to argue.
When I first read this story, I was outraged that the court would take such a radical stand. After reading through the decision however, it appears that there is some ambiguity with the law, but the real problem is the IRS Publication 590. This publication clearly outlines examples where you have two IRAs and you would like to roll these IRAs over. The publication unequivocally states this is possible and legal.
The moral of this story? Perhaps just as the judge said, “Taypayers rely on IRS guidance at their own peril.” Be careful out there.
CREtirement 