IRS grants 60 days to recharacterize a failed Roth IRA conversion

Plain-English summary

The IRS granted a taxpayer 60 days to recharacterize a failed SEP IRA to Roth IRA conversion as a contribution to a traditional IRA. The taxpayer exceeded the income limit for the Roth IRA conversion and was not told about the failed conversion or the available recharacterization election until years later. The IRS found that the taxpayer reasonably relied on tax professionals and that the extension rules were satisfied. The relief was granted under the regulatory-election provisions and required the taxpayer to complete the recharacterization within 60 days of the ruling.

Ruling snapshot

• Question: Could the taxpayer receive extra time to recharacterize a failed SEP IRA to Roth IRA conversion?
• Outcome: Approved, with 60 days from the ruling date to complete the recharacterization
• Key authorities: IRC §§ 408 and 408A; Treas. Reg. §§ 1.408A-5 and 301.9100-1 through -3

Full text (IRS public release)

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

201404016

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION OCT 3 1 2013

Set Ep: RAY TZ

Uniform Issue List: 9100.00-00; 408A.00-00

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Legend:

Taxpayer = ***
Custodian = ***
CPA 1 = ***
CPA 2 = ***
Attorney = ***
Amount A = ***
Amount B = ***
Amount C = ***
Independent Auditor = ***
IRA X = ***
IRA Y = ***
Year 1 = ***

Year 2 = ***

201404016

Year 3 = ***
Year 4 = ***
Year 5 = ***
Dear ***:

This is in response to your request dated March 27, 2012, submitted on your behalf, by
your authorized representative, as supplemented by correspondence dated October 10,
2012, January 8, 2013, January 16, 2013, March 5, 2013, July 11, 2013, July 24, 2013,
August 5, 2013, and September 11, 2013, and a conference held on January 9, 2013, in
which you request relief under section 301.9100-3 of the Procedure and Administrative
Regulations (the "Regulations").

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

Taxpayer owned IRA X, a simplified employee plan (“SEP IRA”) described in section
408(k) of the Internal Revenue Code (the “Code”), and maintained by Custodian. On
December 27, Year 1, Custodian, at Taxpayer's request transferred Amount A from IRA
X, to IRA Y, a Roth IRA described in section 408A of the Code, as a Roth IRA
conversion. IRA Y is also maintained by Custodian.

Taxpayer represents that he relied heavily on CPA 1, his long time Certified Public
Accountant and preparer of his Federal U.S. Individual Income Tax Returns (“Income
Tax Return(s)”), for guidance with respect to his U.S. individual income tax obligations.
Taxpayer consulted with CPA 1 prior to his request to convert IRA X to IRA Y. During
the time of the conversion, CPA 1 represents that he advised and cautioned Taxpayer
of the modified adjusted gross income (“MAGI”) limitations relating to Roth IRA
conversions, as provided by section 408A(c)(3) of the Code. CPA 1 also represents
that at the time of the conversion he had not yet determined Taxpayer's Year 1 MAGI.
Accordingly, Taxpayer represents that he was unaware that his MAGI exceeded the
Roth IRA conversion MAGI limitation at the time of the conversion.

In Year 2, subsequent to the conversion, Taxpayer re-engaged CPA 1 to prepare his
Year 1 Income Tax Return. CPA 1 determined that Taxpayer's MAGI was Amount B.
CPA 1 did not advise Taxpayer at that time that Amount B exceeded the Roth IRA
conversion MAGI limitations and that consequently his conversion from IRA X to IRA Y
was a failed conversion under CPA 1 represents that he does not recall whether he
reviewed the issue of Taxpayer's eligibility to convert IRA X to IRA Y during the time he
prepared the Year 1 Income Tax Return. Accordingly, CPA 1 prepared Taxpayer's Year
1 Income Tax Return to include the conversion as a distribution from IRA X. Taxpayer
was not informed at this time that his conversion was a failed conversion.

201404016

With respect to an unrelated tax matter, during Year 5 Taxpayer engaged CPA 2 to
amend his Year 1 Income Tax Return and Attorney to work on certain aspects of his
amended Year 1 Income Tax Return. CPA 2 notified Taxpayer and Attorney, at that
time, that his MAGI for Year 1 of Amount B and the amended Year 1 MAGI of Amount C
were both greater than the allowed MAGI to convert his SEP IRA to a Roth IRA, and
therefore, his conversion from IRA X to IRA Y was a failed conversion.

Attorney reviewed Taxpayer's original and amended Year 1 Income Tax Return and
concurred with CPA 2’s assessment of the failed conversion. Attorney advised
Taxpayer that under appropriate circumstances a letter ruling may be obtained that
would grant a request of relief to make an election to recharacterize the conversion.
Consequently, Taxpayer was not made aware of the failed conversion and the available
election to recharacterize his Roth IRA to a traditional IRA until December of Year 5.

Taxpayer's request for relief under section 301.9100 of the Regulations was filed shortly
after discovering that his conversion was a failed conversion under section 1.408A-5,
Q&A-9(a)(1) of the I.T. Regulations.

In connection with this submission, Taxpayer provided a statement from Independent
Auditor, who reviewed the Year 1 through Year 5 Income Tax returns and certified
under penalties of perjury that the interests of the Government would not be prejudiced
under the standards set forth under section 301.9100-3(c)(1)(i).

Based on the foregoing facts and representations, you have requested a ruling that,
pursuant to section 301.9100-3 of the Regulations, Taxpayer may be granted a period
not to exceed 60 days from the date of issuance of this ruling to make an election under
section 1.408A-5 of the I.T. Regulations to recharacterize Amount A 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 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 SEP IRA to a Roth IRA: (1) the taxpayer must notify the Roth

201404016

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.

Section 408A(c)(3) of the Code provides, in relevant part, that a taxpayer generally is
not allowed to make a rollover contribution to a Roth IRA from an individual retirement
plan other than a Roth IRA during any taxable year if the taxpayer’s adjusted gross
income for that year exceeds $100,000.

Section 408A(d)(3)(C) of the Code provides that a conversion of a SEP IRA to a Roth
IRA is treated as a rollover from the SEP 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 Internal Revenue
Service (the “Service”) on or after December 31, 1997. Section 301.9100-1(c) provides
that the Commissioner of the Service, 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.

201404016

Section 301.9100-3(c)(1)(ii) of the Regulations provides that the interests of the
Government are ordinarily prejudiced if the taxable year in which the regulatory election
should have been made or any taxable years that would have been affected by the
election had it been timely made are closed by the period of limitations on assessment
under section 6501(a) of the Code before the taxpayer’s receipt of a ruling granting
relief under this section. Section 6501(a) of the Code provides that the amount of any

tax assessed shall be assessed within three years after the return required to be filed by
the taxpayer was filed.

Section 301.9100-3(c)(1)(ii) of the Regulations further provides that for closed years, the
Service may condition a grant of relief on the taxpayer providing the Service with a
statement from an independent auditor other than an auditor providing an affidavit
pursuant to paragraph (e)(3) of section 301.9100-3) certifying that the interests of the
Government are not prejudiced under the standards set forth in Section 301.9100-

3(c)(1)(i), which provides that the interests of the Government will be prejudiced if
granting relief results in the taxpayer having less tax liability in the aggregate for all
taxable years affected by the election than he would have had if the election would have
been timely made (taking into account the time value of money).

The information presented and documentation submitted by Taxpayer is consistent with
Taxpayer's assertion that his failure to elect to recharacterize the Roth IRA on or before
the date prescribed by law, including extensions, for filing his Income Tax Return for the
year of contribution, was caused by Taxpayer reasonably relying on a qualified tax
professional, who failed to advise Taxpayer to make the election. Taxpayer was not
made aware of the failed conversion or the election until after the tax year in question
closed. Taxpayer filed this request for section 301.9100 relief shortly after discovering
he had a failed conversion, and before the Service discovered his failure to make a
timely election to recharacterize the failed conversion.

Based on the above, Taxpayer meets the requirements of section 301.9100-3(b)(1) of
the Regulations, clauses (i), (iii), and (v) for the 2007 tax year. In addition, since the
statute of limitations is closed, under section 301.9100-3(c)(1)(ii) of the Regulations,
granting relief would ordinarily prejudice the interests of the Government. Taxpayer has
provided a statement from an independent auditor (other than the auditors involved in

the identification or correction of the failed conversion) certifying that the interests of the
Government were not prejudiced under the standards set forth under section 301.9100-
3(c)(1)(i) which satisfies a conditional grant of relief under section 301.9100-3(c)(1)(ii).

Accordingly, Taxpayer is granted an extension of 60 days as measured from the date of
the issuance of this ruling letter to recharacterize Amount A as a contribution to a
traditional 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.

201404016

This letter assumes that the above IRA qualifies under either section 408 of the Code or
section 408A of the Code at all relevant times.

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.

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

If you wish to inquire about this ruling, please contact ** (ID # ** at
**** Please address all correspondence to SE:T:EP:RA:T2.

Enclosures:

Deleted copy of this letter
Notice of Intention to Disclose, Notice 437

Cc: ***

Cc: ***
Cc: ***