Late Roth IRA recharacterization allowed

Plain-English summary

A married couple made a Roth IRA conversion even though their income was above the applicable 2008 limit. They asked for more time to recharacterize the failed conversion as a traditional IRA contribution after their tax professional overlooked the relevant Form 1099-R information. The IRS found that the taxpayer acted reasonably and in good faith and granted 60 days from the ruling letter to complete the recharacterization. The relief applied only to the specified conversion, not to regular Roth IRA contributions.

Ruling snapshot

• Question: Whether the taxpayer could receive additional time to recharacterize an ineligible Roth IRA conversion.
• Outcome: Approved, with 60 days to complete the recharacterization.
• Key authorities: IRC § 408A(d)(6); Treas. Reg. § 1.408A-5; Treas. Reg. § 301.9100-3.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE

201234032

WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

MAY 30 2012

Uniform Issue List: 9100.00-00

T:EP:RA:T1

Legend:

Taxpayer A =
Taxpayer B =
IRA C =

Roth IRA D =

Financial Institution E
individual F =
Amount 1 =

Amount 2 =

Dear

This letter is in response to a request for a letter ruling dated May 20, 2011, as
supplemented by additional information dated October 26, November 8, 2011,
April 25, and May 2, 2012, from your authorized representative, in which you
request relief under section 301.9100-3 of the Procedure and Administration
Regulations (“P&A Regulations’).

The following facts and representations have been submitted under penalty of perjury
in support of the ruling requested:

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Taxpayer A is married to Taxpayer B. Taxpayer A maintained IRA C, an individual
retirement account (“IRA”) under section 408(a) of the Internal Revenue Code (the
“Code”), with Financial Institution E. Taxpayer A also maintained Roth IRA D, an IRA
under section 408A of the Code, with Financial Institution E.

On April 7, 2008, Taxpayer A transferred Amount 1 from IRA C to Roth IRA D. At
this time, Taxpayer A believed that he had successfully converted his traditional IRA
to a Roth IRA unaware he was ineligible to do so for the 2008 tax year because
Taxpayers A and B had adjusted gross income (“AGI”) of Amount 2. For this tax
year, the AGI limit under section 408A(c)(3)(B) of the Code for converting

a traditional IRA to a Roth IRA was $100,000, with AGI as modified under section
408A(c)(3)(C). Since the modified AGI of Taxpayers A and B exceeded the limit for
conversions during the 2008 tax year, the conversion was improper. The 2008 tax
year is not a closed year under the statute of limitations.

Taxpayer A also was not aware that a conversion to a Roth IRA could be
recharacterized back to a traditional IRA by making an election to do so on or before the
due date (plus extensions) for the tax year in question. Taxpayer A also believed that all
required documentation had been furnished to Individual F, a certified public accountant
(CPA), in connection with the preparation of Taxpayer A and B’s 2008 Form 1040 tax
return. Taxpayers A and B received a notice, dated February 22, 2010, from the
Internal Revenue Service (the “Service”), advising them that Amount 1 had not been
included in their 2008 Form 1040 tax return in accordance with the Form 1099 R that
was filed with the Service. Then, upon the advice of Individual F, Taxpayer A tried to
recharacterize the conversion from the traditional IRA to the Roth IRA. However, the
trustee of Roth IRA D, Financial Institution E, refused to complete the recharacterization,
telling Taxpayer A that it was prohibited from taking such action after October 15, 2009,
the extended due date of Taxpayer A and B’s Form 1040 tax return, unless the
Taxpayers could produce a letter of authorization from the Service.

The facts also indicate that Taxpayers A and B furnished the above-mentioned
Form 1099 R to Individual F as well as all other necessary financial information for
the 2008 tax year so that their Form 1040 return could be prepared. They relied on
Individual F to complete their return accurately and otherwise advise them on tax
matters. However, Individual F inadvertently overlooked information contained on
the Form 1099 R. Since the modified adjusted gross income of Taxpayers A and B
exceeded $100,000 for tax year 2008, Taxpayer A was required to make a timely
recharacterization of the amount transferred from IRA C to Roth IRA D. In a letter
dated March 3, 2010, to the Service, Individual F admitted that because he
overlooked certain information on Form 1099 R, he failed to advise the Taxpayers

that Amount 1, which was converted to Roth IRA D, had to be recharacterized and
transferred back to a traditional IRA.

Based on the foregoing facts and representations, you have requested that,
pursuant to section 301.9100-3 of the P&A Regulations, Taxpayer A be granted
an additional period of time to recharacterize the failed Roth IRA conversion to a
traditional IRA.

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With respect to your request for relief under section 301.9100-3 of the P&A
Regulations, Code section 408A(d)(6) and section 1.408A-5 of the federal Income
Tax Regulations (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)
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 return for the year of contributions.

Section 1.408A-5, Q&A-2(c)(1) of the I.T. Regulations provides, in effect, that if the
amount of the contribution being recharacterized was contributed to a Roth IRA
and distributions or additional contributions have been made from or to that IRA at
any time, then the net income attributable to the amount of a contribution being
recharacterized is determined by allocating to the contribution a pro-rata portion of
the earnings on the assets in the IRA during the period the IRA held the
contribution. This attributable net income is calculated by using the following
formula: Net Income = Contribution x (Adjusted Closing Balance — Adjusted
Opening Balance)/Adjusted Opening Balance. The items in the above formula are
defined in section 1.408A-5, Q&A-2(c)(2) of the I.T. Regulations.

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.

Code section 408A(c)(3) provided, with respect to the 2008 tax year, that an
individual with modified AGI 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 provides, in summary, that an
individual with modified AGI 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, in summary, that an individual and his spouse
must file a joint federal income tax return to convert a traditional IRA to a Roth IRA,
and that the modified AGI subject to the $100,000 limit for a taxable year is the
modified AGI derived from the joint return using the couple’s combined income.

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Sections 301.9100-1, 301.9100-2, and 301.9100-3 of the P&A 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, revenue ruling, revenue procedure,
notice, or 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 P&A 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 P&A 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)) 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 P&A Regulations provides that a taxpayer will be
deemed to have acted reasonably and in good faith (i) if the taxpayer's 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 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)(i) of the P&A Regulations provides that the interests of the
Government are prejudiced if granting relief would result in a taxpayer having a
lower tax liability in the aggregate for all taxable years affected by the election than
the taxpayer would have had if the election had been made timely.

Section 301.9100-3(c)(1)(ii) of the P&A 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.

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In Taxpayer A and B’s request for a ruling dated May 20, 2011, the authorized
representative states that it is the position of the Taxpayers that the grant of the
extension requested will not prejudice the interests of the Government in that the
tax liability of the Taxpayers will be no lower than would have been the case if the
election to recharacterize Roth IRA D to a traditional IRA had been made timely.

In this case, the adjusted gross income of Taxpayers A and B exceeded the
$100,000 limit under section 408A(c)(3)(B) of the Code for tax year 2008. Thus
Taxpayers A and B were ineligible to convert Amount 1 from traditional IRA C to
Roth IRA D in 2008. Taxpayers A and B were unaware they were ineligible to
convert a traditional IRA to a Roth IRA until they received the notice, dated
February 22, 2010, from the Service, advising them that Amount 1 had not been
reported on their 2008 Form 1040 tax return. In addition, their tax preparer who had
all necessary information to prepare their tax return for the 2008 tax year and advise
them of the necessity to recharacterize the amount converted to Roth IRA D in 2008
admitted that he failed to do so. Taxpayers A and B filed this request for section
301.9100 relief after discovering they were ineligible to make the conversion.

With respect to Taxpayers’ 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 Taxpayer A acted reasonably and in good faith with respect to making the
election to recharacterize the failed conversion as a traditional IRA. Specifically,
the Service has concluded that Taxpayer A has met the requirements of clauses
(iii) and (v) of section 301.9100-3(b)(1) of the regulations and that granting relief
would not prejudice the interests of the Government. Therefore, Taxpayer A is
granted a period of 60 days from the date of the issuance of this letter ruling to
recharacterize Roth IRA D back to a traditional IRA. This ruling only applies to
amounts converted from traditional IRA C to Roth IRA D and not any regular
contributions to the Roth 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 ruling is based on the assumption that all the traditional IRAs and Roth IRAs
described above meet the requirements of Code sections 408 and 408A,
respectively, at all relevant times.

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

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A copy of this letter ruling has been sent to your authorized representative pursuant to
a power of attorney on file in this office. If you wish to inquire about this ruling, please
contact (1.D. # ), ,at( )

Sincerely yours,
Carlton A. Watkins

Manager
Employee Plans Technical Group 1

Enclosures:
Deleted Copy of this Letter
Notice 437

CC: