The General Rules

What if the deadline is missed? Any taxable amount that is not rolled over must be included as income in the year received. If the taxpayer is under age 59 1/2 at the time of the distribution, any taxable portion not rolled over may be subject to a 10 percent additional tax on early distributions.

In a series of private letter rulings, the IRS has granted taxpayers relief from tax bills and penalties. 

For example, one taxpayer from Maine was unable to complete a rollover transaction on time because a major snowstorm made it impossible to get to the bank. The IRS granted a hardship waiver because bad weather was beyond her control. (IRS PLR 200406054)

In another case, a 68-year-old taxpayer who was diagnosed with progressive Alzheimer's disease made a series of withdrawals from his IRA to purchase a house — even though he had other funds available. Based on a medical evaluation requested by his daughter, it was determined that the taxpayer was incapable of understanding the tax consequences of making IRA withdrawals. The IRS waived the 60-day rollover requirement. (IRS PLR 200401025)

Reprieves have also been given to taxpayers whose financial institutions made errors. And in another case, a widow who did not meet the rollover deadline was granted a waiver because she was still in mourning

Facts of the case: The taxpayer’s late husband owned an IRA. Before he turned age 70 1/2, he withdrew some of the funds. After his death, the taxpayer — who was the sole beneficiary and under age 70 1/2 at the time — cashed in the funds and deposited the money in an IRA in her own name. However, she did not complete the rollover within 60 days.

The taxpayer told the IRS she was in mourning over the death of her husband during the timeframe for the rollover. She was also involved in arranging her husband's funeral and taking care of his estate. While handling the estate proceedings, she rolled over the IRA proceeds.

After reviewing the facts, the IRS accepted the widow’s claim. Her failure to comply with the rule was due to the death of her husband and the aftermath. The IRS also noted that the waiver request was submitted shortly after the taxpayer discovered she had missed the deadline. (IRS PLR 200415012)

These are only a few of the examples of waivers granted by the IRS. If you think you — or a loved one — might qualify for a hardship waiver, consult with your attorney about requesting a ruling from the IRS.

*Note: The Pension Protection Act signed by President Bush on August 17, 2006 directs the Treasury Department to issue liberalized rules to allow 401(k) distributions based on hardships and unforeseen financial problems faced by designated beneficiaries of plan participants. We will keep you updated when the new rules are established.