Surprise IRS Victory in IRA Rollover Case

Recent Tax Court Decision

In fact, the surprise victory is in direct conflict with IRS Publication 590, the bible for Individual Retirement Accounts (IRAs). Here it is, in a nutshell: starting in 2015, no matter how many IRA accounts you have, you will only be allowed one rollover per year (no longer one rollover per year per account) [Bobrow v. Commissioner, T.C. Memo. 2014-21, filed January 28, 2014].

“Industry leaders, financial advisers, and everyone else who handles IRAs are stunned,” said Denise Appleby, the editor and publisher of The IRA Authority.
According to Appleby, there are two ways to move money between IRAs:

1. Transfers, which are not reported to the IRS and not reported on a tax return. The IRA owner never touches the money. You can do this as often as you like, whenever you like, Appleby said.
2. And rollovers. With this method, the IRA owner takes the money as a distribution and they have 60-days to rollover (put back) the amount in an IRA. And this, you can do only once per 12-month period, said Appleby.

According to Appleby, the IRS, through their publications and regulations, has said for at least 20 years that the rollover method applies on a “per-IRA” basis. In other words, if you have 12 IRAs, you can do 12 rollovers for the year (12-month period) as long as each IRA does it only once.

In 2008, Alvan Bobrow, who had a few IRAs, rolled over two distributions from his IRAs and took the position that the rollovers were valid because they were done in a timely manner, and involved different IRAs, Appleby wrote in her analysis of the court case. His position was that he had not broken any rules, as explained by the IRS in their publication for the past 20 years.

The IRS disagreed and determined that only one of the two rollovers was valid. So, the IRS and the Bobrows went to court. And the Tax Court—much to the amazement of all IRA experts—agreed with the IRS.

The mistake cost the Bobrows an additional $51,298 in income tax and a penalty of $10,260.

Per the Tax Court, only one of the Bobrow’s distributions was eligible for rollover during the 12-month period. The Tax Court concluded that the Internal Revenue Code Section 408(d)(3)(B) limitation—the relevant section of the federal tax code—applies to all of a taxpayer’s retirement accounts and that regardless of how many IRAs he or she maintains, a taxpayer may make only one nontaxable rollover contribution within each one-year period.

The Bobrow case highlights, according to Appleby, an important rule that we sometimes overlook: “If conflicting information is provided in multiple sources, one must consider the hierarchy and reliability of such sources. In this case, Publication 590 is not authoritative and is not considered official guidance. The Tax Code is the more authoritative, and supersedes any other guidance in the event of conflict.”

What Now?
Well, according to Appleby, the IRS will be changing its publications, changing what they have been saying for 20-plus years. The IRS will implement this change for everyone, everyone except the Bobrows who still have to pay the tax and penalty, starting January 1, 2015.

Appleby said individuals should start moving money via transfers and not rollovers. “There are too many pitfalls with rollovers and none with transfers,” she said.

Starting in 2015, make sure you only do one rollover per year.

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Click here for Reference:  IRS Announcement 2014-15

 

My Second Video Credit! Mike Martin’s “More of Your Taxes Explained”

Just released today!

Mike Martin’s “More of Your Taxes EXPLAINED!” debuted today on YouTube.

Mike is also a Young Adult novelist. His book, THE END GAMES, is available at all online booksellers, including Amazon: http://dft.ba/-theendgamesmartin

This video covers “self-employment” tax issues and general information applicable to all taxpayers.

I was fortunate to be a co-writer and tax adviser for this video. Look for my name “in lights” at the end of the video (it’s even in large type).  To view it, click here.

I hope your tax preparation and filing is going well this year and that some of my blogs have been helpful.

My First Video Credit! Mike Martin’s “How to Do Your Taxes EXPLAINED!”

Just released today!

Mike Martin’s “How to Do Your Taxes EXPLAINED!” debuted today on YouTube.

Mike is also a Young Adult novelist. His book, THE END GAMES, is available at all online booksellers, including Amazon: http://dft.ba/-theendgamesmartin

This video covers “employee” tax issues and general information applicable to all taxpayers.

I was fortunate to be a co-writer and tax adviser for this video. Look for my name “in lights” at the end of the video (it’s even in large type).  To view it, click here.

I hope your tax preparation and filing is going well this year and that some of my blogs have been helpful to you.

 

 

A Special Provision for Writers in the Tax Law

By Gary A. Hensley, MBA, EA

It may be (and usually is) months or years before a writer, author or illustrator has something published and they are compensated for that work.  We generally associate sales as the acid-test for “being” in business.  But is a sale legally required to be in the “business” of writing?  The short answer is “no.”    Can you have “business” losses for several years and still be in the “business” of writing?  The short answer is “yes.”

Artistic Endeavors Take Longer to Bear Fruit

Congress and the Tax Court have both acknowledged that artistic endeavors take longer to bear fruit.  The Internal Revenue Code (IRC) and the associated Treasury Regulations provide the statutory guidance in this area while various court decisions provide interpretations that are binding in all jurisdictions (such as U.S. Supreme Court decisions) or in only some jurisdictions (such as Court of Appeals decisions).

Special Tax Treatment of Prepublication Expenses of Authors

After many years of IRS entrenchment and contrary court decisions, Congress finally added section 263A(h) to the IRC.   IRC section 263A(h) allows “freelance authors, photographers, and artists” to deduct currently business expenses incurred in working on manuscripts that may or may not be published.  Prior to this, expenses had to be deferred (inventoried) and were only expensed at the time the manuscript was sold or started generating royalties (in many cases, years after they were incurred).

Congress and the courts have recognized some of the unique challenges involved in artistic endeavors and have responded with special legal relief.   IRC section 263A(h)(3) defines a writer as “any individual if the personal efforts of such individual create (or may be reasonably expected to create) [emphasis added] a literary manuscript, musical composition (including any accompanying words), or dance score.”    This means that all of your business expenses incurred during the year (under IRC section 162), for short-term and long-term projects, are deductible in the current year as a professional writer (not a hobbyist).

More Than One Occupation

In addition, the Tax Court has, on numerous occasions, affirmed that one can be a full-time employee (or self-employed) in one occupation and also have a “business” in another occupation.  Put another way, you are not limited to being in one business at a time. You may need to share this information with your tax preparer.

Article in the 2014 edition of Christian Writer’s Market Guide

The just-released 2014 edition of Christian Writer’s Market Guide contains my article “Nailing Down Your Professional Status” starting on page 186.

The guide is an excellent resource and I am very pleased that one of my articles was selected for inclusion.  Great way to start the new year!

 

Who Pays Federal Taxes?

The top 1% of all filers paid about 35% of all federal income taxes in 2011, the most recent year IRS has analyzed.  Filers need to have adjusted gross income (AGI) of at least $388,905 to qualify for the top 1% of earners.

The highest 5% paid 56.5% of total income tax.  They each had AGI of at least $167,728.

The top 10% of filers, those with AGIs of $120,136 or more, bore 68.3% of the total tax burden.

The bottom 50% of filers paid 2.9% of the total tax burden.