IRS PLRs May Be Helpful For Missed IRA Rollovers Due To Internet Fraud

Forbes

9 hours ago

Internet fraud continues to rise in the United States. In an unfortunately common scenario, a fraudster befriends an individual on social media, builds a rapport, and suggests an investment opportunity. In building additional trust with the soon-to-be-victim, the fraudster urges the individual to make a small initial investment, which later delivers double-digit returns. When the investor suggests a willingness to make a larger investment, the fraudster (aware of U.S. retirement accounts and rollover rules) nudges the individual to withdraw retirement funds to make the investment under the guise that the investor can transfer the funds back to a retirement account tax-free within the applicable 60-day window for retirement account rollovers.
In many instances, the criminal takes the funds and disappears, leaving the victim with a huge loss and even more massive tax headache. Specifically, the retirement plan must notify the IRS of the taxable retirement distribution by issuing an IRS Form 1099-R, Distributions from Pensions, Annuities, Retirements or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. In some cases, a taxpayer may be eligible to claim a deductible theft loss to mitigate some of the federal income tax consequences. I've discussed the theft loss issue in prior articles here and here.
Fortunately, there are instances where taxpayers make a withdrawal from their retirement accounts but do not deliver the funds to the criminal. For example, taxpayers may discover the fraud in speaking of the transaction with family members or friends who advise them not to transfer the funds, or financial institutions may step in to stop what they perceive as a fraudulent transfer. Here, taxpayers may be even more fortuitous in having a window to transfer the funds to another retirement account to meet the 60-day rollover period. But can taxpayers who have their retirement funds and who miss the 60-day window to make a rollover avoid adverse tax consequences on a withdrawal that they otherwise would not have made absent the fraudster's intervention?
Possibly. Section 408(d)(3) of the Internal Revenue Code of 1986, as amended, which applies to individual retirement accounts, provides that the IRS may waive the 60-day rollover requirement where 'equity and good conscience' require it. Equity and good conscience may require an extended rollover period if the rollover was prevented by casualty, disaster, or other events that were beyond the reasonable control of the taxpayer. The list is not exclusive and depends largely on the particular facts and circumstances. In addition, this type of relief generally requires the taxpayer to submit a private letter ruling (PLR).
Significantly, the IRS has granted extensions of the 60-day rollover period where taxpayers were the victims of fraudulent schemes. However, taxpayers interested in requesting relief through the PLR procedures should recognize the request is not an easy one, requiring the taxpayer to submit a litany of information to the agency to review whether the taxpayer satisfies the 'equity and good conscience' exception.
Taxpayers in these circumstances should also be aware that the United States Tax Court has held that it has jurisdiction to review, in certain instances, the IRS' determinations concerning a PLR request for an extension of the 60-day window. In Estate of Caan v. Commissioner, 161 T.C. 77 (2023), the taxpayer submitted a PLR that requested an extension of the 60-day rollover period due to equity and good conscience factors. After the IRS refused to grant the PLR, the taxpayer asked the court to review the agency's determination over the IRS' objection that the court lacked subject-matter jurisdiction to review it. The Tax Court disagreed with the IRS and held that it had subject-matter jurisdiction to review the IRS' PLR determinations under an abuse of discretion standard.
In sum, taxpayers who have withdrawn funds from retirement accounts due to fraud sometimes have options under the federal income tax laws. In these unfortunate circumstances, taxpayers should speak with a qualified tax professional to determine whether there are valid methods to mitigate against the often unfair tax consequences associated with the retirement fund withdrawal.