PLR 1219035: IRS grants extra time to recharacterize a Roth IRA

Plain-English summary

The taxpayer converted a traditional IRA to a Roth IRA after relying on an expected income level that was below the applicable conversion threshold. Revised partnership information later showed that the taxpayer's income could exceed the threshold, so the taxpayer and spouse were advised to recharacterize the Roth IRAs as traditional IRAs. The financial-services company recharacterized the husband's account but failed to complete the taxpayer's account because of a processing oversight. The IRS granted up to 60 days to recharacterize the taxpayer's Roth IRA as a traditional IRA because the taxpayer relied on the company, acted promptly after discovering the error, and no affected tax years were closed.

Ruling snapshot

• Question: Could the taxpayer receive extra time to recharacterize a Roth IRA as a traditional IRA after the financial-services company missed the deadline?
• Outcome: Approved
• Key authorities: IRC § 408A(c)(3)(B); Treas. Reg. §§ 1.408A-4, 1.408A-5, and 301.9100-3

Full text (IRS public release)

201219035

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

FEB 08 2012

U.I.L. 9100.00-00, 408A.00-00

XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX

T:EP:RA:T3

Legend:

Taxpayer A = XXXXXXXXXXXXXXXXXXXXX
Individual P = XXXXXXXXXXXXXXXXXXXXX
Company F = XXXXXXXXXXXXXXXXXXXXX
Company B = XXXXXXXXXXXXXXXXXXXXX
Year 1 = XXXXXXXXXXXXXXXXXXXXX
Year 2 = XXXXXXXXXXXXXXXXXXXXX
Year 3 = XXXXXXXXXXXXXXXXXXXXX
Year 4 = XXXXXXXXXXXXXXXXXXXXX
Amount D = XXXXXXXXXXXXXXXXXXXXX
IRA X = XXXXXXXXXXXXXXXXXXXXX
Roth IRA Y = XXXXXXXXXXXXXXXXXXXXX

Page 2 201219035

Dear XXXXXXXXXXX:

This is in response to your letter dated XXXXXXXXXXXXXX, submitted on your
behalf by your authorized representative, in which you request relief under
section 301.9100-3 of the Procedure and Administration Regulations
(Regulations).

The following facts and representations have been submitted in support of your
request.

Taxpayer A established IRA X on XXXXXXXXX of Year 1 with Company B.
Taxpayer A has been a client of Company F for a long time and has relied upon
the advice of Company F for her tax preparation and tax planning.

Based on the analysis of Taxpayer A's expected Year 2 financial situation,
Company F believed that Taxpayer A's modified adjusted gross income (MAGI)
would not exceed the then requisite threshold for converting IRA X to a Roth IRA.
So, upon the advice of Company F, Taxpayer A and her husband decided to
convert their traditional IRAs to Roth IRAs on XXXXXXXXX of Year 2. However, in
the middle of Year 3, based on revised Form 1065, Schedule K-1 Partner's Share
of Income, Deductions, Credits, etc. (Schedule K-1) estimates, Company F
discovered that Taxpayer A's MAGI for Year 2 would possibly exceed the
$ [illegible] threshold amount and as a result, Taxpayer A would probably not
be eligible to convert IRA X to Roth IRA Y. Company F had no way of knowing
that Taxpayer A's Year 2 MAGI would increase until the actual Schedule K-1
arrived in XXXXXXXXX of Year 3.

In Year 3, Company F advised Taxpayer A and her husband that they would
have to recharacterize their Roth IRAs as traditional IRAs. In XXXXXXXXX of Year
3, Company F took the necessary steps to recharacterize Taxpayer A's
husband's Roth IRA as a traditional IRA but, due to a processing oversight,
inadvertently failed to recharacterize Taxpayer A's Roth IRA Y as a traditional
IRA by the due date (with extensions) for filing Taxpayer A's Year 2 joint Federal
income tax return.

Taxpayer A did not discover this error on the part of Company F until XXXXXXXXX of
Year 4 when Company F notified Taxpayer A that the IRA had not been
recharacterized and advised her to request a ruling for an extension of time to
recharacterize her Roth IRA as a traditional IRA.

Individual P, an employee of Company F, provided a written affidavit that
Company F failed to complete the recharacterization.

The Service has not discovered Taxpayer A's failure to make a timely election.

Page 3 201219035

Based on the above facts and representations, you request a ruling 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 ruling to recharacterize Roth IRA Y as
a traditional IRA.

With respect to your ruling request, section 408A(d)(6) of the Code and
section 1.408A-5 of the Federal Income Tax Regulations (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-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.

For years prior to 2010, section 408A(c)(3)(B) of the Code provides, in relevant
part, 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 I.T. Regulations relating to years prior to 2010,
provides that an individual with MAGI 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-2 further provides that a married individual may convert a
traditional IRA to a Roth IRA only if he and his spouse file a joint Federal Income
Tax Return and the MAGI subject to the $100,000 limit for a taxable year is the
MAGI derived from the joint return using the couple's combined income.

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

Page 4 201219035

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.

Taxpayer A's ruling request requires the Internal Revenue Service to determine
whether she is eligible for relief under the provisions of section 301.9100-3 of the
regulations.

Taxpayer A was not aware of the fact that the attempted recharacterization of
Roth IRA Y back to a traditional IRA had not been timely implemented until
December of Year 4. She relied on Company F to accomplish the
recharacterization, and Company F failed to complete the recharacterization by
the deadline for doing so. Upon realizing this failure, Taxpayer A, in a timely
manner, submitted this request for relief under section 301.9100 of the
Regulations. Also, no tax years that would have been affected by the election to
recharacterize Roth IRA Y, had it been timely made, are closed by the statute of
limitations.

Page 5 201219035

Under the set of circumstances described above, Taxpayer A satisfies the
requirements of section 301.9100-3(b)(1) of the Regulations. Accordingly, we
rule that, pursuant to clauses (i) and (v) of section 301.9100-3 of the Regulations,
Taxpayer A is granted a period not to exceed 60 days from the date of this letter
ruling to recharacterize Amount D of Roth IRA Y as a traditional IRA.

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

This letter is directed only to the taxpayer 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 your authorization on file in this office.

If you wish to inquire about this ruling, please contact XXXXXXXXXXXXXXXX, at
XXXXXXXXXXX.

Sincerely yours,

[illegible] For: Laura B. Warshawsky, Manager
Employee Plans Technical Group 3

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

CC: XXXXXXXXXXXXXXXXXXX
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