Roth recharacterization relief granted after return preparer misconduct

Plain-English summary

A taxpayer instructed a financial institution to recharacterize five Roth IRAs after their values declined, but his longtime return preparer failed to file the taxpayer's return and did not disclose the failure. A new adviser later discovered both the missing return and that the former preparer had fraudulently cashed earlier refund checks. Because the taxpayer had acted diligently and the failure resulted from events beyond his control, the IRS granted 60 days to complete the Roth-to-traditional IRA recharacterizations under Treas. Reg. § 301.9100-3.

Ruling snapshot

• Question: Could the taxpayer receive extra time to recharacterize five 2010 Roth IRA conversions after his preparer failed to file the return?
• Outcome: Approved, with a 60-day extension.
• Key authorities: IRC §§ 408 and 408A(d)(6); Treas. Reg. §§ 1.408A-5 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

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

MAY 09 2014

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

Legend:

Taxpayer A = ***
Tax Advisor S = ***
Tax Advisor M = ***
Financial Institution F = ***
Financial Institution T = ***
Amount A = ***
IRA B = ***
Roth IRA X-1 = ***
Roth IRA X-2 = ***
Roth IRA X-3 = ***
Roth IRA X-4 = ***
Roth IRA X-5 = ***
Roth IRA Y-1 = ***
Roth IRA Y-2 = ***
Roth IRA Y-3 = ***
Roth IRA Y-4 = ***
Roth IRA Y-5 = ***
IRA Z = ***

Dear ***:

This is in response to your letter dated November 7, 2012, as supplemented by
correspondence dated June 27, 2013, submitted on your behalf, by your authorized
representative, in which you request relief under section 301.9100-3 of the Procedure
and Administrative Regulations (“Regulations”).

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

In 2010, Taxpayer A maintained an individual retirement account, IRA B, as described
in section 408(a) of the Internal Revenue Code (“Code”) with Financial Institution F. On
December 31, 2010, Taxpayer A converted IRA B into Roth IRA X-1, Roth IRA X-2,
Roth IRA X-3, Roth IRA X-4, and Roth IRA X-5, Roth IRAs described in section 408A of
the Code.

In August 2011, in a trustee to trustee transfer, Taxpayer A transferred Roth IRA X-1,
Roth IRA X-2, Roth IRA X-3, Roth IRA X-4 and Roth IRA X-5 from Financial Institution F
to Financial Institution T, into Roth IRA Y-1, Roth IRA Y-2, Roth IRA Y-3, Roth IRA Y-4,
and Roth IRA Y-5, respectively.

Due to a decrease in account values, Taxpayer A decided to recharacterize his Roth
IRAs into a traditional IRA. He notified Financial Institution T of his intent and Financial
Institution T effected the transfer of Taxpayer A’s Roth IRAs into a traditional IRA, IRA
Z, on October 12 and October 13 of 2011.

Thereafter, Tax Advisor S, a certified public accountant (“CPA”) prepared Taxpayer A’s
2010 Federal income tax return. Taxpayer A believed that the return had been timely
filed by Tax Advisor S. Tax Advisor S had prepared and filed Taxpayer A’s Federal
income tax returns for 29 years.

In January 2012, Taxpayer A hired Tax Advisor M, a CPA, to prepare his 2011 Federal
income tax return. Tax Advisor M, upon Taxpayer A’s request, determined that
Taxpayer A’s 2010 Federal income tax return was never filed. Tax Advisor S never
informed Taxpayer A that the 2010 Federal income tax return was never filed.

Tax Advisor M also determined that the Internal Revenue Service (“Service”) had issued
tax refund checks for the Federal income tax returns Tax Advisor S had filed on behalf
of Taxpayer A in 2008 and 2009 which had been fraudulently cashed by Tax Advisor S
for his own personal gain.

The 2010 Federal income tax return was filed in May 2012 and reported the 2010 Roth
IRA conversions as income. In June 2012, Taxpayer A filed a 2010 amended Federal
income tax return, prepared by Tax Advisor M. The amended return reduced Taxpayer
A’s income by Amount A, the total amount of the Roth IRA recharacterization. The
Service denied credit for Taxpayer A’s Roth IRA recharacterization for the 2010 tax year
because his 2010 Federal income tax return had not been timely filed and therefore, the
Roth recharacterization was not timely made.

The statute of limitations on Taxpayer A’s 2010 Federal income tax return remains
open.

Based on the foregoing facts and representations, you have requested a ruling that,
pursuant to section 301.9100-3 of the Regulations, Taxpayer A be granted a period not
to exceed 60 days from the date of this letter ruling to recharacterize the 2010
contributions to Roth IRA Y-1, Roth IRA Y-2, Roth IRA Y-3, Roth IRA Y-4, and Roth IRA
Y-5 as contributions to 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 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 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 before the due date (including extensions) of the
tax return for the year the recharacterization contribution was made.

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 provides for an automatic extension of 6 months
from the due date of a return, excluding extensions, to make elections that otherwise
must be made by the due date of the return or the due date of the return plus
extensions, provided (1) the taxpayer's return was timely filed for the year the election
should have been made and (2) the taxpayer takes appropriate corrective action within
this 6-month period.

Section 301.9100-3 of the Regulations 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.

The information presented and documentation submitted by Taxpayer A is consistent
with his assertion that after exercising reasonable diligence and after attempting to
recharacterize the Roth IRAs in October 2011, his failure to recharacterize Roth IRA Y-
1, Roth IRA Y-2, Roth IRA Y-3, Roth IRA Y-4, and Roth IRA Y-5 on or before the date
prescribed by law, including extensions, for filing his Federal income tax return for the
year of contribution, was caused by intervening events beyond his control, namely the
failure of Tax Advisor S to file his 2010 tax return.

Based on the above, Taxpayer A meets the requirements of section 301.9100-3(b)(1) of
the Regulations, clauses (i) and (ii), for the 2010 tax year. Accordingly, Taxpayer A is
granted an extension of 60 days as measured from the date of the issuance of this
ruling letter to recharacterize Roth IRA Y-1, Roth IRA Y-2, Roth IRA Y-3, Roth IRA Y-4
and Roth IRA Y-5 to traditional IRA Z.

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.

The letter assumes that the above IRAs qualify 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.

Pursuant to a power of attorney on file with this office, a copy of this letter ruling is being
sent to your authorized representative.

If you wish to inquire about this ruling, please contact *** (ID# , at () ***.

Sincerely yours,

Laura B. Warshawsky, Manager
Employee Plans Technical Group 3

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

cc: ***