IRS Offers Transition Relief for IRA Owners

The Internal Revenue Service is providing transition relief to owners of individual retirement accounts and individual retirement annuities relating to the application of a one-rollover-per-year limitation of the Tax Code.

Announcement 2014-15 provides transition relief for IRA holders who would be affected by the one-rollover-per-year limitation in Section 408(d)(3)(B) of the Tax Code, which generally provides that any amount distributed from an IRA will not be included in the gross income of the distributee to the extent the amount is paid into an IRA for the of the distributee’s benefit, no later than 60 days after he or she receives the distribution. An individual is permitted to make only one rollover in any one-year period. In a proposed regulation and in Publication 590, “Individual Retirement Arrangements,” the limitation is applied on an IRA-by-IRA basis.

However, a recent Tax Court opinion, Bobrow v. Commissioner, T.C. Memo. 2014-21, held that the limitation applies on an aggregate basis, meaning that an individual could not make an IRA-to-IRA rollover if he or she had made such a rollover involving any of the individual’s IRAs in the preceding 1-year period. The IRS said it anticipates that it will follow the interpretation of Section 408(d)(3)(B) in Bobrow and, accordingly, intends to withdraw the proposed regulation and revise Publication 590 to the extent needed to follow that interpretation.

The IRS said these actions would not affect the ability of an IRA owner to transfer funds from one IRA trustee directly to another, because such a transfer would not be a rollover and, therefore, would not be subject to the one-rollover-per-year limitation. The IRS said it has received comments about the administrative challenges presented by the Bobrow interpretation of Section 408(d)(3)(B) and understands that adoption of the Tax Court’s interpretation of the statute would require IRA trustees to make changes in the processing of IRA rollovers and in IRA disclosure documents, which would take time to implement.

Accordingly, the IRS said it would not apply the Bobrow interpretation of Section 408(d)(3)(B) to any rollover that involves an IRA distribution occurring before the beginning of next year. “Regardless of the ultimate resolution of the Bobrow case, the Treasury Department and the IRS expect to issue a proposed regulation under Section 408 that would provide that the IRA rollover limitation applies on an aggregate basis,” said the IRS. “However, in no event would the regulation be effective before January 1, 2015.”