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Rolling Over Taxpayers

Friday April 4th, 2014   •   Posted by Craig Eyermann at 8:43am PDT   •  

Tax DayIf you have an Individual Retirement Account (IRA), and particularly if you have more than one IRA, you need to be aware that a recent U.S. Tax Court decision has opened the door to allow the IRS to nail you for taxes if you attempt to rollover money from more than one of your IRAs into another in a given year. That is despite the information that the IRS has been providing to people who own IRAs in Publication 590 over the past 20 years that says otherwise.

CBS Marketwatch’s Robert Powell reports on the recent U.S. Tax Court decision that affected Alvan and Elisa Bobrow:

In 2008, Alvan 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, Uncle Sam and the Bobrows went off to court. And the Tax Court—much to the surprise 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. Maybe they should be thankful; it could have cost them $31,000 more, according to Appleby. You can read the gory details in Bobrow v. Comm’r, T.C. Memo. 2014-21.

So what was the bottom line? In essence, only one of the Bobrow’s distributions was eligible for rollover during the 12-month period. In fact, that 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.

In other words, we’ve all been operating under the impression that what was written in Publication 590—you know, the IRS’ very own publication—was correct. But it’s not.

This outcome is a new example of how the IRS’ bureaucrats can provide misleading information to U.S. taxpayers. Misleading information that puts ordinary Americans at direct risk of having the federal government punish them with major financial losses if they make the mistake of trusting it.

That situation is made worse because of deliberate decisions by the government agency’s leadership in recent years to dramatically cut back on providing assistance for U.S. taxpayers with tax questions to focus instead on developing a more intrusive role in the lives of ordinary Americans through the implementation of the Affordable Care Act (a.k.a. “Obamacare”), the politically-motivated scrutiny of opponents to President Obama’s policies and lavish expenses for employee conferences.

Providing timely and accurate information to U.S. taxpayers would not appear to rank very highly in their list of priorities.

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April 2014