PLR 1122033: IRS grants late relief to recharacterize a Roth IRA conversion

Plain-English summary

An individual instructed a financial institution to convert part of a traditional IRA to a Roth IRA, but did not learn that the conversion had occurred until after the deadline for changing it. The individual had not received a timely Form 1099-R and therefore filed a tax return without reporting the conversion. The IRS found that the individual acted reasonably and in good faith because the financial institution did not timely provide the form. It granted relief through the date on which the financial institution recharacterized the amount as a contribution to a traditional IRA.

Ruling snapshot

• Question: May the individual make a late election to recharacterize part of a Roth IRA conversion as a traditional IRA contribution?
• Outcome: Approved, with the amount treated as a valid recharacterization under the ruling's conditions.
• Key authorities: IRC §§ 301.9100, 408, 408A, 6110; Treas. Reg. §§ 1.408A-5, 301.9100-1 through 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 MAR 9 2011

UIL No.: 9100.00-00

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

SE:T:EP:RA:T2

Legend:
Taxpayer A XXXXXXXXXX
Financial Institution D XXXXXXXXXX
Tax Preparer G XXXXXXXXXX
IRA X XXXXXXXXXX
XXXXXXXXXX
Roth IRA Y XXXXXXXXXX
XXXXXXXXXX
Amount 1 XXXXXXXXXX
Amount 2 XXXXXXXXXX
Date 1 XXXXXXXXXX
Date 2 XXXXXXXXXX
Date 3 XXXXXXXXXX
Date 4 XXXXXXXXXX
Year 1 XXXXXXXXXX
Dear XXXXXXXXXX:

This is in response to a request dated August 20, 2010, as supplemented by information
received during our conference on February 10, 2011 and additional correspondence dated
February 17, 2011, in which your authorized representative requests relief under section
301.9100-3 of the Procedure and Administration Regulations (“Regulations”) on your behalf.
The following facts and representations have been submitted under penalty of perjury in
support of the ruling requested.

Taxpayer A maintained Individual Retirement Arrangement (“IRA”) X, a traditional IRA
described in section 408 of the Internal Revenue Code (the “Code”). In December of Year
1, Taxpayer A instructed IRA custodian, Financial Institution D to convert Amount 1 from
IRA X to a Roth IRA, described in section 408A of the Code. Taxpayer A represents that he
did not receive either a confirmation that the conversion had been completed or a Form
1099-R from Financial Institution D reflecting any such transaction, prior to the due date for
filing his individual tax return for 2008, and therefore concluded that a conversion did not
occur in 2008. Tax Preparer G filed Taxpayer A’s 2008 individual tax return by the
extended due date, on or about Date 2 with no mention of any conversion.

In November of 2009, Taxpayer A and Tax Preparer G discussed a Roth conversion in
connection with Taxpayer A’s year-end tax planning for 2009. During a subsequent
discussion with Financial Institution D, Tax Preparer G was advised that Amount 1 had
been converted to a Roth IRA on Date 1. On Date 3, Financial Institution D furnished a
copy of the Form 1099-R for 2008 to Tax Preparer G, reporting Amount 1 as a Roth IRA
conversion for 2008. Taxpayer A represents that Financial Institution D could not confirm
delivery of the original Form 1099-R for 2008 at an earlier date.

Taxpayer A represents that he first learned that the conversion of Amount 1 actually
occurred on Date 1 in November of 2009. By this time, the deadline for recharacterizing the
conversion in 2008 had passed. Prior to Date 4, Taxpayer A directed Financial Institution
D to recharacterize Amount 2 as a contribution to a traditional IRA. Financial Institution D
recharacterized Amount 2 as a traditional IRA on Date 4 and reported the recharacterization
on a Form 1099-R for 2009. A copy of the Form 1099-R was sent to Taxpayer A in March
of 2010.

Based on the foregoing facts and representations, Taxpayer A has requested a ruling that,
pursuant to section 301.9100-3 of the Regulations he be granted until Date 4 to make an
election under section 1.408A-5 of the Income Tax Regulations (the “I. T. Regulations”) to
recharacterize Amount 2 as a contribution to a traditional IRA.

With respect to your request for relief under section 301.9100-3 of the Regulations, section
408A(d)(6) of the Code and section 1.408A-5 of the I.T. 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) of the Code and
section 1.408A-5 of the I.T. Regulations, this recharacterization election generally must
occur on or before the date prescribed by law, including extensions, for filing the taxpayer’s
Federal Income Tax Return for the year of contribution.

Section 1.408A-5, Q&A-6, of the I.T. Regulations 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.

Prior to December 31, 2009, Section 408A(c)(3)(B) of the Code provided, in relevant part,
that a taxpayer generally is not allowed to make a rollover contribution to a Roth IRA from
an eligible retirement plan during any taxable year if the taxpayer’s adjusted gross income
for that year exceeds $100,000. For taxable years beginning after December 31, 2009,
the $100,000 limitation on adjusted gross income in Code section 408(c)(3)(B) was
eliminated.

Section 408A(d)(3)(C) provides that a conversion of a traditional IRA to a Roth IRA is
treated as a rollover from the traditional IRA to the Roth IRA.

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) provides that the Commissioner of Internal Revenue, 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 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.

The information presented and documentation submitted by Taxpayer A is consistent with
his assertion that his failure to elect to recharacterize the Roth IRA on or before the date
prescribed by law, including extensions, for filing his Federal Income Tax Return for the
year of contribution, was caused by his lack of awareness of the necessity of making an
election as a result of Financial Institution D’s failure to provide a timely Form 1099-R, thus
making it impossible for Taxpayer A timely to elect to recharacterize his Roth IRA
conversion back to a traditional IRA.

Based on the above, Taxpayer A meets the requirements of section 301.9100-3(b)(1) of
the Regulations, clause (ii), for the 2008 tax year. In addition, since the statute of limitations is
still open, under section 301.9100-3(c)(1)(ii) of the Regulations, granting relief will not
prejudice the interests of the Government.

Accordingly, Amount 2, which was placed in a traditional IRA on Date 4 will be considered
a valid recharacterization within the meaning of 408A(d)(6) of the Code and section
1.408A-5 of the I.T. Regulations.

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 ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the Code
provides that it may not be used or cited by others as precedent.

Should you have any concerns regarding this ruling, please contact XXXXXXXXXX,
Identification Number *, at () -*. Please address all correspondence to
SE:T:EP:RA:T2.

Sincerely yours,

Donzelli Littlejohn, Manager
Employee Plans Technical Group 2

Enclosures:
Deleted copy of ruling letter
Notice of Intention to Disclose