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May 19, 2020

Do I Need a Private Letter Ruling for My Self-Directed IRA?

You may have heard private letter rulings (PLRs) referred to by tax or financial professionals when discussing the permissibility of a transaction under the tax laws associated with self-directed IRAs. A PLR is a written determination issued by the IRS in response to a taxpayer’s request to interpret and apply the tax laws to a specific set of facts. IRA owners apply for a PLR when they want assurance that a transaction will not violate tax laws. A PLR may only be requested if the issue in question has not already been addressed by statute, regulation, IRS guidance or a tax court decision. Most IRA owners are not considering IRA investments and transactions outside the realm of existing guidance and authority, and therefore don’t need a PLR. But there are circumstances in which it may be beneficial to request a determination, especially when a significant sum of money or tax liability is at stake. Common PLR requests in years past dealt with the following types of issues:

• Waiver of penalty tax for modification of a series of substantially equal periodic payments

• Waiver of 60-day rollover deadline

• Distribution options for beneficiaries of trusts and estates named as IRA beneficiary

• Waiver of the deadline to recharacterize contributions to a Roth IRA

 

Progression of PLRs in Recent Years

Many of the transactions that were the subject of a high volume of PLRs in the past have now been addressed in IRS guidance, eliminating the need for a PLR on those topics. That is a good thing for IRA owners because PLRs can be costly. At one time, the user fee for requesting a PLR started at $500. The fee increased depending on the subject of the request and the dollar amount in question. Many deemed this price sufficiently low to take a chance on receiving a favorable ruling. Today, the fee for a requesting a PLR for an IRA transaction is generally $10,000. With a fee this large, without guarantee of a favorable ruling, many IRA owners find the cost of requesting a PLR outweighs the potential benefit of a favorable ruling.

Fortunately, the IRS has provided guidance that has reduced the need for PLRs in certain situations. For example, over the last several years, the IRS has provided guidance on waivers of the 60-day rollover deadline, a common PLR topic in past years.

• An automatic waiver of the 60-day rollover deadline is available in situations where the issue is solely due to an error on the part of the IRA trustee or custodian.

• The IRS has shared the information it will consider in determining whether to grant PLRs for 60-day rollover waivers. The IRS will consider all facts and circumstances, including

• Whether failure to grant the waiver would be against equity or good conscience;

• Whether errors were made by a service provider;

• Whether the rollover was not completed because of death, disability, hospitalization, incarceration, serious illness, restrictions imposed by a foreign country, or postal error;

• Whether the funds were used; and

• The time elapsed since the distribution.

• The IRS has also created a process in which an IRA owner may self-certify qualification for a waiver of the 60-day rollover deadline to complete the rollover.

 

For more information on the different types of 60-day waivers available, see Retirement Plans FAQs relating to Waivers of the 60-Day Rollover Requirement.

 

PLRs as Precedent

A PLR may be relied on only by the taxpayer who requested it and cannot be cited as authority or precedent by another taxpayer. But the IRS makes PLRs available to the public (personally identifying information is removed), which allows tax professionals and taxpayers to see how the IRS has ruled given a specific set of facts. PLRs can provide insight to the IRS’s analysis of the law and the likelihood of whether a favorable ruling might be granted in a similar situation, particularly when there are numerous PLRs with similar fact patterns and rulings. A database of PLRs can be found on the IRS website.

 

PLR Requests

Most taxpayers engage a legal or tax professional to help evaluate whether the taxpayer should request a PLR and to draft the request. The IRS requires specific information and documentation be submitted in a PLR request, including a detailed description of the facts and an analysis of the law applicable to the ruling requested. The IRS may refuse to consider a PLR request if any of the required elements are missing. The procedures, fees, and a checklist for obtaining a PLR are published annually in the first IRS revenue procedures of the year (e.g., Revenue Procedure 2020-1 and 2020-4 for 2020.)  

 

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