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.”
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.
Click here for Reference: IRS Announcement 2014-15