By Ian Berger, JD
IRA Analyst

A recently announced IRS program gives you new ways to fix certain IRA errors. Unfortunately, it won’t be as helpful as it seems.

In the 2022 SECURE 2.0 legislation, Congress gave the IRS two years – until December 29, 2024 – to come up with rules allowing IRA owners and custodians to correct mistakes through self-correction. (The IRS already has a correction program for employers to correct retirement plan mistakes.) Well, almost 22 months after that deadline, the IRS has finally published those rules.

The new program – the IRA Compliance Resolution System (ICRS) – permits IRA owners (including beneficiaries of inherited IRAs) and custodians to fix certain IRA failures by submitting their proposed correction to the IRS for approval and paying a fee. ICRS will become available on May 1, 2027.

At least for now, ICRS does not allow IRA owners or custodians to self-correct errors on their own, without going to the IRS, as the correction program for retirement plans does. But there are already several self-correction programs in place for IRA owners to use, and they can still be used after May 1. (More details below.)

An ICRS submission will require an IRA owner to pay a filing fee of $3,500. The submission looks to be fairly complicated, so payment of additional fees to a CPA or attorney to do the paperwork will also likely be necessary.

Unfortunately, ICRS is limited to correction of only four IRA mistakes (although the IRS says it may expand the list):

• Missed Required Minimum Distributions (RMDs). There’s a 25% penalty for missing an RMD, but that is reduced to 10% if the missed RMD is corrected in a timely manner. However, the IRS will usually waive the penalty entirely if the IRA owner withdraws the missed RMD and files Form 5329 with a reasonable-cause statement. The IRS says that this reasonable-cause correction method will continue to be available. So, ICRS will only be needed for IRA owners who don’t have reasonable cause for missing RMDs (or for IRA custodians who were responsible for missed distributions).
• IRA Establishment Failures. This occurs when an IRA owner requests that a custodian establish a particular type of IRA (e.g., a traditional IRA), but the custodian mistakenly opens a different type (e.g., a Roth IRA). For this error only, a submission to the IRS must be made by December 31 of the year following the year in which the incorrect account was established.
• Nonspouse Beneficiary Rollovers. Nonspouse beneficiaries cannot do 60-day rollovers of inherited IRAs, so any distribution they receive is taxable and possibly subject to penalty. ICRS provides relief if such a beneficiary receives a distribution or does a 60-day rollover, but only if she provides evidence that a custodian, financial advisor, CPA or attorney had led her to believe that a tax-free rollover could be done.
• 60-Day Rollover Failures. Unlike the other three correctable failures, this one covers both IRA owners and company plan participants. Since 2016, the IRS has allowed retirement account owners to use “self-certification” to cure 60-day rollover failures if the deadline was missed because of one of 12 specified reasons and the rollover is completed as soon as possible. Self-certification is free. However, if the deadline is missed for a reason other than one of those 12 reasons, the IRA owner or plan participant currently must obtain relief from the IRS by requesting a private letter ruling (PLR). From May 1, 2027 through the end of 2027, retirement account owners can continue to request a PLR or use ICRS for a 60-day rollover failure that doesn’t qualify for self-certification. Effective in 2028, only ICRS can be used.

If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.

https://irahelp.com/irs-establishes-new-correction-program-for-fixing-ira-errors/