Credit Morningstar for publicizing this doozy of a case!

A tax lawyer and partner in an established law firm personally made two IRA-to-IRA rollovers in a 12-month period. He did so in reliance on an IRS publication which advises that a taxpayer can do so if no single IRA is involved in more than one rollover. Unfortunately, the applicable provision of the Internal Revenue Code permits only one rollover per taxpayer in any 12-month period. The IRS audited the lawyer’s tax return and disallowed one of his two rollovers which would trigger current tax on the entire amount of the disallowed rollover. The lawyer’s defense was a statement in an IRS publication that rollovers were limited on a per IRA basis.

The Tax Court decided the matter in favor of the IRS position on audit and held that IRS publications intended to provide coherent explanations of the tax laws are not binding on the IRS. The Court further expounded that taxpayers “rely on IRS guidance at their own peril.” The case is Bobrow v. Commissioner (T.C. Memo. 2014-21).

In response to the Bobrow decision, the IRS has revised Publication 590-A which was the publication that misled Mr. Bobrow.

If a tax lawyer can be misled by IRS publications, what chance does the average taxpayer stand in getting reliable information from the IRS? The answer for those who contact the IRS with specific questions about their taxes is “proceed at your peril.” Only about 25 percent of IRS taxpayer inquiries are answered correctly. Also note that lawyers routinely rely on IRS publications as reliable condensations of the Internal Revenue Code and related regulations. We expect such publications to accurately express the IRS position on tax matters (they are not balanced commentaries on any contested tax issues).

The facts in the _Bobrow _case suggest an additional approach. Bearing in mind that a “rollover” is defined as a two-step transfer from one IRA to another. The first step is a distribution to the individual IRA owner. The second step is the transfer of the distributed funds by the individual to the recipient IRA within 60 days. But a direct transfer from one IRA to another IRA (which the IRS calls a “trustee-to-trustee transfer”) is not a “rollover” (see Rev. Rul. 78-406). Such direct transfers are not subject to the one-rollover-per-year rule. Similarly, the one-rollover-per-year rule does not apply to qualified retirement plan transfers to IRAs (and vice versa) as well as retirement plan to plan transfers.

TAKEAWAY:

Direct transfers can take the place of a rollover with less complication and no annual limit on the number of transactions. It is safer and easier to do a direct transfer whenever possible.

Andrew S. Williams has practiced in the employee benefits and ERISA arena since ERISA was passed in 1974. He has been recognized by his peers through a survey conducted by Leading Lawyers Network as among the top 5 percent of Illinois lawyers in Small, Closely and Privately Held Business Law and Employee Benefit Law. He maintains a website, www.BenefitsLawGroupofChicago.com, with additional updates, commentary and analysis on benefits and employment topics.

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