PLR 1218037: IRS grants more time to recharacterize two Roth IRA conversions

Plain-English summary

A married couple asked for more time to recharacterize Roth IRA conversions after their tax advisor discovered that their modified adjusted gross income exceeded the limit for the relevant year. The advisor reported the recharacterizations but failed to tell the taxpayers to notify the trustee and transfer the funds back to traditional IRAs before the deadline. The IRS concluded that the taxpayers reasonably relied on a qualified tax professional and that relief would not prejudice the government. It granted each taxpayer up to 60 days from the letter date to recharacterize the specified Roth IRA, one back to a SEP IRA and the other back to a traditional IRA.

Ruling snapshot

• Question: May the taxpayers receive more time to recharacterize their Roth IRA conversions?
• Outcome: approved
• Key authorities: IRC §§ 408A(c)(3), 408A(d)(6), and 408(k); Treas. Reg. §§ 1.408A-4, 1.408A-5, and 301.9100-3

Full text (IRS public release)

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

TAX EXEMPT AND FEB 07 2012 201218037

DIVISION

UIL No.: 9100.00-00
T.E.P.R.A.T
Legend :

Taxpayer A =

Taxpayer B =

Traditional IRA C =

Traditional IRA D =

Roth IRA E =

Roth IRA F =

Tax Advisor G =

Sum H =

Sum | =

Company M =

Dear

This is in response to a letter dated May 24, 2011, as supplemented by
correspondence dated January 10, 2012, in which your authorized representative
requests relief under section 301.9100-3 of the Procedure and Administration

Regulations (the “regulations”) on your behalf. You submitted the following facts and
representations in connection with your request.

Taxpayer A participates in a simplified employee pension plan (“Traditional IRA C”) as
defined in section 408(k) of the Internal Revenue Code (the “Code”). Taxpayer B
maintained an individual retirement arrangement (“Traditional IRA D”) as described in
section 408(a). On or about December 20, 2009, Taxpayer A converted a portion of
Traditional IRA C equal to Sum H into Roth IRA E, and Taxpayer B converted

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Traditional IRA D equal to Sum I into Roth IRA F. All of the IRA accounts are
maintained by Company M.

2

While preparing Taxpayer A’s and Taxpayer B’s joint Federal Income Tax Return for

20 (“20 Return’), the Taxpayers’ CPA, Tax Advisor G, discovered that the
Taxpayers’ modified adjusted gross income exceeded the $ limitation in Code
section 408A(c)(3) for the 20 year. Tax Advisor G proceeded to recharacterize the
Roth conversions and reported the recharacterizations on the Taxpayers’ 20 Return,
which was timely filed on April 7,20 . In March of 2011, after the due date for a timely
recharacterization of the Taxpayers’ Roth conversions, Tax Advisor G realized he had
failed to advise Taxpayers A and B to notify their IRA trustee and request a transfer of
the funds from Roth IRAs E and F back to traditional IRA accounts.

On October 11, 20 , the Internal Revenue Service (the “Service”) issued the
Taxpayers a Notice of Deficiency pertaining to the 20 — taxable year.

Based on your submission and the above facts and representations, you request a
ruling that pursuant to section 301.9100-3 of the regulations, Taxpayer A and Taxpayer
B be granted an extension of time to recharacterize Roth IRAs E and F back to
traditional IRAs.

With respect to your request for relief under section 301.9100-3 of the regulations,
Code section 408A(c)(3) provides that an individual with an adjusted gross income (as
modified within the meaning of subparagraph (c)(3)(C)) 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 of the federal Income Tax Regulations (the “I.T. Regulations”)
provides 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.

Section 1.408A-4, Q&A-4 of the I.T. Regulations provides that a SEP IRA can be
converted to a Roth IRA on the same terms as an amount in any other traditional IRA.

Code section 408A(d)(6) and section 1.408A-5, Q&A-1 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 originally 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. 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, Q&A-5 of the I.T. Regulations provides that employer contributions

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(including elective deferrals) under a SEP IRA cannot be recharacterized as
contributions to another IRA under Q&A-1 of this section. However, an amount
converted from a SEP IRA to a Roth IRA may be recharacterized under Q&A-1 of this
section as a contribution to a SEP IRA, including the original SEP IRA.

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.

Sections 301.9100-1, 301.9100-2, and 301.9100-3 of the regulations 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

201218037

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.

In this case, Taxpayers A and B were not eligible to convert Traditional IRAs C and D,
respectively, into Roth IRAs because their modified adjusted gross income exceeded

$ for20 . Taxpayers A and B failed to recharacterize their Roth IRAs back to
traditional IRAs by the time permitted by law. Therefore, it is necessary to determine
whether Taxpayers A and B are eligible for relief under the provisions of section
301.9100-3 of the regulations.

In preparing the Taxpayers’ 20 Return, Tax Advisor G discovered that the Taxpayers
were ineligible to convert their traditional IRAs into Roth IRAs and proceeded to
recharacterize the conversions by April 15,20 _, the due date for recharacterizing the
conversions. He reported the recharacterization of the Taxpayers’ Roth conversions on
line 15a of their 20. Return and reported a “0” taxable amount on line 15b. However,
he failed to advise the Taxpayers to inform Company M of the recharacterizations, to
provide Company M with the necessary information, and to request a transfer back to
Traditional IRAs C and D. Tax Advisor G did not discover his mistake until March,

20 __, after the due date for recharacterizing the 20 _—conversions (i.e., the due date of
the Taxpayers’ 20 Return), had passed. Thus, Taxpayer A and Taxpayer B satisfy
clause (v) of section 301.9100-3(b)(1) because they reasonably relied on Tax Advisor
G. In addition, because the statute of limitations on the Taxpayers’ 20 Return
remains open, the interests of the government would not be prejudiced by providing
relief.

Accordingly, we rule that, pursuant to section 301.9100-3 of the regulations:

Taxpayer A is granted a period not to exceed 60 days from the date of this letter to
recharacterize Roth IRA E back to a SEP IRA; and

Taxpayer B is granted a period not to exceed 60 days from the date of this letter to
recharacterize Roth IRA F back to a traditional IRA.

This letter assumes that the above IRAs qualify under Code section 408 at all relevant
times.

This letter is directed only to the taxpayers who requested it. Code section 6110(k)(3)
provides that it may not be used or cited as precedent.

A copy of this letter has been sent to your authorized representative in accordance with
a power of attorney on file with this office.

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5
Should you have any concerns regarding this ruling, please contact

Sincerely yours,

[signature]

Carlton A. Watkins, Manager
Employee Plans Technical Group 1

Enclosures:
Deleted copy of letter
Notice 437

cc: