IRS grants more time to recharacterize Roth IRA conversions

Plain-English summary

A married couple asked for extra time to recharacterize Roth IRA conversions back to traditional IRAs after receiving poor financial and tax advice. The IRS found that the taxpayers reasonably relied on advice from a financial advisor and a tax advisor and were unaware of the need to make the election by the deadline. It granted a period of no more than 60 days to complete the recharacterizations. The ruling assumed that the IRAs otherwise qualified under IRC §§ 408 and 408A.

Ruling snapshot

• Question: Could the taxpayers receive an extension of time to recharacterize their Roth IRAs as traditional IRAs?
• Outcome: Approved, with a period not to exceed 60 days from the ruling date.
• Key authorities: IRC §§ 408, 408A, and 6110; Treas. Reg. §§ 1.408A-5 and 301.9100-3

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
OCT 10 2012

[illegible]

UIL No.: 9100.00-00

Legend :
Taxpayer A =
Taxpayer B =

Traditional IRA C =

Traditional IRA D =

Roth IRA E =

Roth IRA F =

Financial Advisor G =

Tax Advisor H =

=

Amount 1 =
Amount 2 =
Company M =
Company N =

Company O =

Dear

This is in response to a letter dated May 15, 2012, in which your authorized
representative requests relief under section 301.9100-3 of the Procedure and

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

In 20°, Taxpayer A maintained an individual retirement arrangement (“Traditional IRA
C”) as described in section 408(a) of the Internal Revenue Code (the “Code”) with
Company N. In 2010, Taxpayer B, Taxpayer A's spouse, maintained an individual
retirement arrangement (“Traditional IRA D”) as described in section 408(a) with
Company N. In November of 20, Taxpayer A and Taxpayer B received information
from Financial Advisor G of Company M, an affiliate of Company N, regarding the
possibility of converting Traditional IRA C and Traditional IRA D into Roth IRAs. After
discussing the matter further, Financial Advisor G recommended that, based on
Taxpayer A's and Taxpayer B’s financial situation, Taxpayer A and Taxpayer B should
convert Traditional IRAs C and D into Roth IRAs. In December of 20 _, pursuant to
Financial Advisor G's advice, Taxpayer A converted his Traditional IRA C, equal to
Amount 1, into Roth IRA E and Taxpayer B converted her Traditional IRA D, equal to
Amount 2, into Roth IRA F. Both Roth IRA E and Roth IRA F are Roth IRAs described
under Code section 408A. Currently, Roth IRAs E and F are maintained by Company
O.

At the time of the conversions, Taxpayer A was unemployed and receiving monthly
distributions from Traditional IRA C. During November and December of 20 ;
Taxpayer A repeatedly asked Financial Advisor G whether it was prudent to convert
Traditional IRA C and Traditional IRA D into Roth IRAs based on Taxpayer A’s and
Taxpayer B's financial situation, and Financial Advisor G confirmed that it was.
Financial Advisor G also provided Taxpayer A and Taxpayer B with an illustration of the
benefits of converting their traditional IRAs into Roth IRAs; however, the illustration was
based on assumptions Financial Advisor G knew did not apply to Taxpayer A and
Taxpayer B.

During February of 20°, Taxpayer A and Taxpayer B met with Tax Advisor H, a
certified public accountant (“CPA”), to prepare their 20° " joint federal Income Tax
Return. Although Tax Advisor H was aware of the monthly withdrawals from Roth IRA

E and Taxpayer A's and Taxpayer B’s financial situation, he failed to inform them of the
tax impact of converting their traditional IRAs into Roth IRAs. Tax Advisor H also failed to
inform them that they could recharacterize their Roth IRAs back into traditional IRAs
to lessen their tax burden, and that the deadline for doing so was October 15, 20

During March of 20°, Taxpayers A and B became aware of the devastating financial
impact of the conversions, and the faulty advice provided by Financial Advisor G and
Tax Advisor H.

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

Code section 408A(d)(6) and section 1.408A-5, Q&A-1 of the federal Income Tax

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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.

Sections 301.9100-1, 301.9100-2, and 301.9100-3 of the P&A 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 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 generally that applications for
relief that fall within section 301.9100-3 will be granted when the taxpayer provides
sufficient evidence 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 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.

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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.

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 P&A
Regulations.

In December of 20°, Taxpayer A and Taxpayer B were advised by Financial Advisor G
to convert their traditional IRAs into Roth IRAs. However, Financial Advisor G failed to
take into account that Taxpayer A was unemployed and receiving monthly distributions
from Traditional IRA C. Financial Advisor G advised Taxpayer A and Taxpayer B to
convert their IRAs based on faulty assumptions. In addition, Tax Advisor H failed to
inform Taxpayer A and Taxpayer B of the election to recharacterize their Roth IRAs
back into traditional IRAs to avoid the heavy tax burden in tax years 20° and 20 that
resulted from their IRA conversions. Had Taxpayer A and Taxpayer B been provided
correct information regarding the conversions by Financial Advisor G or Tax Advisor H,
they would have retained their traditional IRAs, or recharacterized the conversions by
the time permitted by law.

In this case, Taxpayers A and B reasonably relied on incorrect advice provided by
Financial Advisor G in converting their traditional IRAs into Roth IRAs. Taxpayer A and
Taxpayer B further relied on Tax Advisor H, who failed to inform them of the tax
consequences regarding the conversions, and that they could recharacterize the
conversions through October 15,20. Thus, Taxpayer A and Taxpayer B satisfy
Clauses (iii) and (v) of section 301.9100-3(b)(1) of the P&A Regulations because, after
exercising reasonable diligence, the taxpayers were unaware of the necessity for the
election, and they reasonably relied on Financial Advisor H and Tax Advisor G.

Accordingly, we rule that, pursuant to section 301.9100-3 of the P&A Regulations,
Taxpayer A and Taxpayer B are granted a period not to exceed 60 days from the date
of this letter to recharacterize Roth IRA E and Roth IRA F back to traditional IRAs.

This letter assumes that the above IRAs and Roth IRAs qualify under Code sections
408 and 408A, respectively, 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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Should you have any concerns regarding this ruling, please contact ,at .

Sincerely yours,

Culler, A. Wotkins

Carlton A. Watkins, Manager
Employee Plans Technical Group 1

Enclosures:
Deleted copy of letter
Notice 437

CC: