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IRA
60-Day
Rollover Waiver Denied
• New
Bankruptcy Law •
Six-Month Filing
Extensions •
EPCRS (Box)
•
State Economic
Development Incentives (Box) Lesli S. Laffie, J.D., LL.M.
IRA 60-Day Rollover Waiver Denied A recent letter ruling may serve as a warning to victims of Hurricanes Katrina and Rita, even though it dealt with a 2004 Florida hurricane. Letter Ruling 200544022 denied a waiver of the 60-day limit for a tax-free IRA rollover requested by a taxpayer located in an area that received relief from Federal tax deadlines for hurricanes that swept Florida in 2004. Facts: The taxpayer took an IRA distribution in July 2004 to facilitate the purchase of a new home. He anticipated that a home equity loan secured by the new house would permit him to repay the IRA withdrawal within 60 days. Severe hurricane damage to the new home delayed the processing of the home equity line of credit. As a result, the taxpayer did not receive the home equity loan until April 2005, after the expiration of the extended deadline provided for the disaster area in IR-2004-115. Holding: The IRS refused to grant additional discretionary relief; essentially, the taxpayer used the IRA withdrawal as a short-term loan. The Service has issued a fact sheet (FS-2005-18) reminding debtors of their new responsibilities under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (P.L. 109-8), which generally went into effect for bankruptcy petitions filed after Oct. 17, 2005. The new law requires debtors to comply with certain tax-filing responsibilities, as well as provide copies of previously filed returns to creditors in some circumstances. Filing returns: Under the new law, the IRS may request the bankruptcy court to order a dismissal or a conversion of a bankruptcy petition if the debtor fails to file a tax return (or fails to file for an extension) that becomes due after the date the petition is filed. A dismissal or conversion may also be ordered if a Chapter 11 debtor fails to pay any Federal tax obligations owed after the date the bankruptcy petition is filed. Chapter 13 debtors must also file all Federal tax returns for the four-year period before the bankruptcy petition, to have their bankruptcy plan confirmed. Copies of returns: Generally, the new law requires that debtors must provide a copy of their most recently filed Federal tax return (or a transcript) to any requesting creditor. In addition, the debtor must provide a copy of the return to the bankruptcy trustee at least seven days before the first meeting of creditors. If a debtor files an amended return or files any returns that are past due while the bankruptcy case is pending, copies must be filed with the bankruptcy court at the same time they are filed with the Service. Means testing: One of the centerpieces of the new law is a “means test” designed to force Chapter 13 debtors to make regular payments on their debts based on certain income thresholds. To determine the means test, a bankruptcy court is authorized to use IRS-published expense standards; however, these standards are for tax purposes only and may differ from those established by a bankruptcy court. Regulations IR-2005-131 announced that taxpayers will be able to request an automatic, six-month filing extension for most common individual and business returns under new regulations (TD 9229, 11/7/05). The new rules provide streamlined and simplified procedures expected to save taxpayers between $73 million–$94 million annually, by eliminating or consolidating several existing IRS forms. As a result, as of Jan. 1, 2006, most individuals and businesses will be able to request a full six-month filing extension, without a reason or signature. Prior law (noncorporate): The new procedures will replace the existing two-step process, under which noncorporate taxpayers could obtain only a six-month extension, by first obtaining an extension (usually automatic) for part of that period and then requesting a discretionary extension for the remainder. A filing extension does not extend the payment deadline. Individuals: Beginning with 2005 returns due in 2006, individuals will be able to use a single IRS form (Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return) to get an automatic six-month extension of time to file. This will replace the existing two-step process under which an automatic extension was only allowed for four months (generally, until August 15). If more time was needed, a taxpayer had to explain why, using a second form (Form 2688, Application for Additional Extension of Time To File U.S. Individual Income Tax Return). About 6% of individual taxpayers requested the initial four-month extension, and about a third of those went on to request a second extension (usually for two months, until October 15). Form 2688 will be eliminated. Businesses: Extension procedures will also be streamlined for business taxpayers, thus eliminating three existing forms. Under current procedures, only corporations can request an automatic six-month filing extension. The new regulations will also make this option available to most noncorporate business taxpayers, including partnerships and trusts. Accordingly, as of Jan. 1, 2006, all eligible business taxpayers will use Form 7004, Application for Automatic Extension of Time to File Corporation Income Tax Return, to request an automatic six-month extension. In the past, eligible noncorporate business taxpayers had to request an initial three-month extension and, if more time was needed, then request another three months.
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