Taxpayers have little to complain about in the IRS’s recent guidance significantly expanding relief for individuals who mistakenly took required minimum distributions (RMDs) this year, but the agency may have overstepped its authority.
In Notice 2020-51, 2020-29 IRB 1, the IRS took several steps to remove obstacles in the way of taxpayers fully benefiting from the provision waiving RMDs for 2020 in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136). One such obstacle was the limit of one IRA rollover per 12-month period.
Ordinarily, taxpayers are allowed to roll over a distribution from one IRA into another without tax consequences, but they’re limited to one rollover per 12-month period. In the notice, the IRS sidestepped this issue by opting to treat 2020 rollovers of RMD distributions as “repayments” for purposes of the 12-month rule, while still treating them as rollovers for purposes of the extended 60-day deadline for rolling over RMDs.
“This was an interesting feat of creative interpretation in drafting, I would suggest,” Ben Norquist of Convergent Retirement Plan Solutions LLC said on a June 26 webinar hosted by his company. The IRS has historically been constrained in its ability to make exceptions to the 12-month rule because that limit is found in the statute, he observed.
That relief will be especially welcome to individuals who receive systematic withdrawals on a monthly or quarterly basis, Norquist said, explaining that while they may have received relief from a prior notice that extended the 60-day deadline for rollovers to July 15, many had already received multiple distributions and were limited to rolling over just one of them.
And by treating those transactions as repayments rather than rollovers for purposes of the 12-month rule, the notice opened the door for non-spousal beneficiaries to repay RMDs, which has historically been prohibited, Norquist said.
The agency had to do a lot of “mental gymnastics to thread the needle to find a way to give taxpayers the relief that the IRS is looking to provide,” Norquist said.
Jeffrey Levine of Buckingham Wealth Partners was more blunt. “I don’t think there’s any question they exceeded their legal authority here. It seems overt, blatant, and in your face, and they just didn’t care,” he told Tax Notes.
Breaking Precedent
There’s plenty of precedent, both from the IRS in letter rulings and in Tax Court decisions, establishing that the IRS can’t give relief from the once-per-year rule, according to Levine.
“I know there’s been a number of cases in the past where judges have essentially said, ‘Wow, we feel bad because this is an inequitable outcome, but we can’t do anything because we don’t make the rules; Congress has to,’” Levine said.
Levine said that although the IRS's stance is undoubtedly taxpayer-friendly and thus highly unlikely to be challenged in court, he's still concerned that it took a position that he believes it would have known was beyond its authority.
“It creates a dangerous precedent,” Levine said. “While this seems harmless, the next time the IRS decides to do something more controversial on its own, how is that going to go?” Taxpayers could challenge the IRS in court, but that’s a costly and time-intensive process, he said.
Systems Check
Retirement plan administrators could run into some practical challenges implementing the IRS notice.
Norquist predicts an increase in RMD repayment activity in the wake of the generous new guidance, and said retirement plan administrators will need to ensure they’re prepared to process those client requests. That entails making sure that software systems can actually produce the transactions that are being requested, he said.
In the case of repayments for a non-spousal beneficiary account, “you may very well have restrictions on your system that don’t allow rollovers into a non-spouse beneficiary account,” Norquist said. “So sooner rather than later is probably the time to be looking at those potential challenges and trying to determine what you can do for workarounds or interim solutions,” he added.
Norquist also predicts a potential flurry of coronavirus-related distributions from retirement accounts. If financial challenges from the COVID-19 pandemic continue and as awareness of the option to take those distributions grows, there could be a surge of activity around this relief provision in the third and fourth quarters of this year, he said.
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