PLR 200222028: Six more months to undo an ineligible Roth IRA conversion

Plain-English summary

A taxpayer converted a traditional IRA to a Roth IRA in 1998 without realizing that the couple's income exceeded the then applicable $100,000 conversion limit. The couple filed their 1998 return late, so the taxpayer could not use the special extensions announced for timely filers. Their accountant discovered the problem while preparing the overdue return, and they asked for more time to reverse the conversion before the IRS discovered it. The IRS found that the taxpayer had acted reasonably and in good faith and that the affected tax year was still open. It granted six months from the ruling date to recharacterize the Roth IRA as a traditional IRA and directed the taxpayer to file a consistent 1998 return.

Ruling snapshot

• Question: Could the taxpayer receive extra time to recharacterize an ineligible 1998 Roth IRA conversion?
• Outcome: Approved: six months from the ruling date.
• Key authorities: IRC § 408A; Treas. Reg. §§ 1.408A-5, 301.9100-3.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION

JAN 16 2002

UIC: 9100.00-00

LEGEND:
Taxpayer A:
Taxpayer B:
IRA X:
IRA Y:
Company M:
Accounting Firm N:
Month 1:

Dear:

This is in response to the , letter, submitted by your authorized representative on your behalf, in which you request relief under section 301.9100-3 of the Procedure and Administration Regulations. The following facts and representations support your ruling request.

Taxpayer A maintained IRA X, an individual retirement arrangement described in section 408(a) of the Internal Revenue Code, with Company M. During 1998, Taxpayer A converted IRA X to a Roth IRA, IRA Y, also with Company M.

Taxpayer A is married to Taxpayer B. Taxpayers A and B file joint Federal Income Tax Returns.

During 1998, Taxpayer A was not aware that his adjusted gross income exceeded the limits found in Code section 408A(c)(3)(B). Additionally, due to a series of events, Taxpayer A and Taxpayer B did not timely file their calendar year 1998 Federal Income Tax Return.

In Month 1, 2001, Taxpayers A and B engaged Accounting Firm N to prepare their past due Federal Income Tax Returns including the 1998 return. During the preparation of said 1998 return, Accounting Firm N advised Taxpayers A and B that their 1998 Federal Income Tax Return would show adjusted gross income in excess of the limits found at Code section 408A(c)(3)(B), referenced above, and that, as a result, Taxpayer A was ineligible to convert his traditional IRA, IRA X, to a Roth IRA, IRA Y. Accounting Firm N subsequently prepared a joint 1998 Federal Income Tax Return for Taxpayers A and B which indicated that their 1998 adjusted gross income exceeded
$100,000.

Accounting Firm N subsequently filed this request for relief under section 301.9100-3 of the Procedure and Administration Regulations on behalf of Taxpayer A.

This request for relief under section 301.9100-3 of the Procedure and Administration Regulations was filed with the Internal Revenue Service prior to the Service’s discovering that Taxpayer A was not eligible to convert his IRA X to Roth IRA Y and prior to the Service’s discovering that Taxpayer A had not timely recharacterized his Roth IRA Y as a traditional IRA. As of the date of this ruling request, Taxpayer A’s Roth IRA Y had not been recharacterized.

Taxpayers A and B will file a joint calendar year 1998 Federal Income Tax Return which reflects their correct adjusted gross income for 1998. 1998 is not a “closed” tax year.

Based on the above, you, through your authorized representative, request the following letter ruling:

That, pursuant to section 301.9100-3 of the regulations, Taxpayer A is granted a period not to exceed six months from the date of this ruling letter to recharacterize his Roth IRA, IRA Y, as a traditional IRA.

With respect to your request for relief under section 301.9100-3 of the regulations, section 408A(d)(6) of the Internal Revenue Code and section 1.408A-5 of the Income Tax Regulations provide that, except as otherwise provided by the Secretary, a taxpayer may elect to recharacterize an IRA contribution made to one type of IRA as having been made to another type of IRA by making a trustee-to-trustee transfer of the IRA contribution, plus earnings, to the other type of IRA. In a recharacterization, the

IRA contribution is treated as having been made to the transferee IRA and not the transferor IRA. Under section 408A(d)(6) and section 1.408A-5, this recharacterization election generally must occur on or before the date prescribed by law, including extensions, for filing the taxpayer’s federal income tax returns for the year of contributions.

Section 1.408A-5, Question and Answer-6, describes how a taxpayer makes the election to recharacterize the IRA contribution. To recharacterize an amount that has been converted from a traditional IRA to a Roth IRA: (1) the taxpayer must notify the Roth IRA trustee of the taxpayer’s intent to recharacterize the amount, (2) the taxpayer must provide the trustee (and the transferee trustee, if different from the transferor trustee) with specified information that is sufficient to effect the recharacterization, and (3) the trustee must make the transfer.

Code section 408A(c)(3), provides, in relevant part, that an individual with adjusted gross income in excess of $100,000 for a taxable year is not permitted to make a qualified rollover contribution to a Roth IRA from an individual retirement plan other than a Roth IRA during that taxable year.

Section 1.408A-4, Q&A-2, provides, in summary, that an individual with modified adjusted gross income in excess of $100,000 for a taxable year is not permitted to convert an amount to a Roth IRA during that taxable year.

Sections 301.9100-1, 301.9100-2, and 301.9100-3 of the regulations, in general, provide guidance concerning requests for relief submitted to the Service on or after December 31, 1997. Section 301.9100-1(c) of the regulations provides that the Commissioner of the Internal Revenue Service, in his discretion, may grant a reasonable extension of the time fixed by a regulation, a revenue ruling, a revenue procedure, a notice, or an announcement published in the Internal Revenue Bulletin for the making of

an election or application for relief in respect of tax under, among others, Subtitle A of the Code.

Section 301.9100-2 of the regulations lists certain elections for which automatic extensions of time to file are granted. Section 301.9100-3 of the regulations generally provides guidance with respect to the granting of relief with respect to those elections not referenced in section 301.9100-2. The relief requested in this case is not referenced in section 301.9100-2.

Section 301.9100-3 of the regulations provides that applications for relief that fall within section 301.9100-3 will be granted when the taxpayer provides sufficient evidence (including affidavits described in section 301.9100-3(e)(2)) to establish that (1) the

taxpayer acted reasonably and in good faith, and (2) granting relief would not prejudice the interests of the government.

Section 301.9100-3(b)(1) of the regulations provides that a taxpayer will be deemed to have acted reasonably and in good faith (i) if its request for section 301.9100-1 relief is filed before the failure to make a timely election is discovered by the Service; (ii) if the taxpayer inadvertently failed to make the election because of intervening events beyond the taxpayer's control; (iii) if the taxpayer failed to make the election because, after exercising reasonable diligence, the taxpayer was unaware of the necessity for the election; (iv) the taxpayer reasonably relied upon the written advice of the Service; or (v) the taxpayer reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election.

Section 301.9100-3(c)(1)(ii) of the regulations provides that ordinarily the interests of the government will be treated as prejudiced and that ordinarily the Service will not grant relief when tax years that would have been affected by the election had it been timely made are closed by the statute of limitations before the taxpayer's receipt of a ruling granting relief under this section.

Announcement 99-57, 1994-24 I.R.B. 50 (June 14, 1999) provided that a taxpayer who timely filed his/her 1998 Federal Income Tax Return would have until October 15,

1999 to recharacterize an amount that had been converted from a traditional IRA to a Roth IRA.

Announcement 99-104, 1999-44 I.R.B. 555 (November 1, 1999), provided that a taxpayer who timely filed his/her 1998 Federal Income Tax Return would have until December 31, 1999 to recharacterize an amount that had been converted from a traditional IRA to a Roth IRA.

Taxpayers A and B did not timely file their 1998 Federal Income Tax Return. As a result, Taxpayer A was not eligible for relief under either Announcement 99-57 or Announcement 99-104. Therefore, it is necessary to determine if he is eligible for relief under the provisions of section 301.9100-3 of the regulations.

In this case, Taxpayer A was ineligible to convert his IRA X to Roth IRA Y since his and his wife’s adjusted gross income for calendar year 1998 exceeded $100,000. However, at the time of the conversion and until he discovered otherwise as a result of his calendar year 2001 contacts with Accounting Firm N, Taxpayer A believed that his IRA X had been properly converted to a Roth IRA, IRA Y. Furthermore, Taxpayer A’s ineligibility to convert his IRA X to Roth IRA Y and his failure to timely recharacterize

his Roth IRA Y were not discovered by the Service prior to his filing this request for letter ruling.

With respect to your request for relief, we believe that, based on the information submitted and the representations contained herein, the requirements of sections 301.9100-1 and 301.9100-3 of the regulations have been met, and that you have acted reasonably and in good faith with respect to making the election to recharacterize your Roth IRA as a traditional IRA. Specifically, the Service has concluded that you have met the requirements of clauses (i) and (iii) of section 301.9100-3(b)(1) of the regulations.

Therefore, with respect to your ruling request, the Service concludes as follows:

That, pursuant to section 301.9100-3 of the regulations, Taxpayer A is granted a period of time, not to exceed six months from the date of this letter ruling, to recharacterize his Roth IRA Y to a traditional IRA.

No opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the Code or regulations which may be applicable thereto.

This letter is directed only to the taxpayer that requested it. Section 6100(j)(3) of the Code provides that it may not be used or cited as precedent.

Please note that in conjunction with recharacterizing Taxpayer A’s Roth IRA Y, Taxpayer A must file a calendar year 1998 Federal Income Tax Return consistent with this letter ruling.

Pursuant to a power of attorney on file with this office, a copy of this letter ruling is being sent to your authorized representative.

This letter ruling was prepared by of this Branch. He can be reached at

Sincerely yours,

Frances V. Sloan

Manager, Employee Plans
Technical Group 3

Tax Exempt and Government
Entities Division

Enclosures:

Deleted copy of ruling letter
Notice of Intention to Disclose