Check deposit for annual IRA contribution returned for insufficient funds

[Guest ERISA_kid]

I have a situation where my organization (an IRA custodian) received and deposited a check for $3,000 on 4/12/04. The check represented a $3,000 IRA contribution for 2003. The check was returned by the drawing bank for insufficient funds on 4/19/04 and, consequently, the IRA contribution was removed for 2003. The client has presented the same check for reprocessing and wants us to credit the IRA with a $3,000 contribution for 2003.

Our policy has always been that the check must be received in good order and negotiable form by April 15th in order to credit the contribution for the previous year. The only exception to this policy is for checks received after April 15th in an envelope postmarked by April 15th.

Given the fact that I face this issue at least a dozen times each year, I would like to know if anyone is aware of any authority that would support the above position, whether that authority directly relates to IRA contributions or addresses other similar tax situations such as the timing of gifts for purposes of the annual gift tax exclusion.

As always, any insight would be greatly appreciated.

[Appleby]

Hey Kid ,

I see (from one of your earlier posts) that you attend university in my neighborhood- Maplewood/South Orange. Hey neighbor

Regarding your question, this is no different than if the individual presented you with a new/different check on 4/19. The fact that the check bounced is tantamount to a check never being presented ( to your financial institution)

As far as cites…

If the check is returned by the bank for insufficient funds, or bounces for any other reason, it is deemed that no contribution was made when the check was presented by the drawer ( IRA owner) [springfield Productions, Inc, 38 TCM 74 (1979)]PLR 8824047

Not to mention that the drawer may have committed fraud by presenting a check for which he/she knowingly has no funds to cover . I doubt your financial institution could be forced to be party to a fraudulent transaction by purporting that the transaction satisfies IRS requirements (in this instance, meets the 04/15 deadline) …don’t say that to the client though, he/she may get upset :angry:

[John G]

Just another reason to not wait to the middle of April to contribute to your Roth IRA. If this had been done 6 weeks earlier, the error could have been corrected in time.

A note to all readers, in this modern era where banks charge huge fees for bounced checks, why is anyone using an account that does not have overdraft protection or a simple line of credit backing it up?

[Guest ERISA_kid]

John_G,

Agreed. You would think clients wouldn't wait until the last minute on this type of stuff. Definitely a lesson learned!

Appleby,

As always, your insight is invaluable. Thanks for the information.