Reporting errors justify late Roth IRA recharacterization

Plain-English summary

A retiree intended to place the pretax portion of a retirement-plan distribution in a traditional IRA and the after-tax portion in a Roth IRA. Successive plan recordkeepers overstated her after-tax contributions, causing pretax money to be rolled into the Roth IRA without her realizing that a recharacterization election was needed. After corrected reporting exposed the error, the IRS found that she had acted reasonably and in good faith and that relief would not prejudice the government. It gave her 60 days to recharacterize the affected amount, plus earnings, from the Roth IRA to her traditional IRA.

Ruling snapshot

• Question: Could the retiree make a late election to recharacterize an erroneously reported Roth IRA contribution?
• Outcome: Approved, with 60 days to complete the recharacterization
• Key authorities: IRC § 408A(d)(6); Treas. Reg. §§ 1.408A-5 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

201509070
DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

DEC 04 2014

Uniform Issue List: 9100.00-00

T:EP:RA:T1

Legend:

Taxpayer A =
Company B =
Company C =
Plan D =

Plan E =

Plan F =

Roth IRA G =

Financial Institution H =

Financial Institution I =
Amount 1 =
Amount 2 =
Amount 3 =

Amount 4 =

Dear

This is in response to your request for a ruling dated April 30, 2014, as
supplemented by correspondence dated June 24, and September 9, 2014,
submitted on your behalf by your authorized representative, in which you request

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relief under section 301.9100-3 of the Procedure and Administration Regulations
(“P&A Regulations”).

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

Taxpayer A worked many years for Company B and participated in Plan D.
Taxpayer A contributed both pre-tax and after-tax contributions to Plan D. In
December of 2006, Taxpayer A’s entire account balance of Amount 1 in Plan D
was rolled over to Plan E, also maintained by Company B. The record keeper for
both Plans, Financial Institution H, erred in reporting the portion of Taxpayer A’s
account attributable to after-tax contributions on Form 1099-R for 2006. Amount 3
was reported as after-tax employee contributions instead of Taxpayer A’s actual
after-tax contributions, Amount 2.

In 2008, Financial Institution H was replaced by Financial Institution I. On May 10,
2010, as part of a bankruptcy reorganization, the name of Taxpayer A’s employer,
Company B, changed to Company C, and the name of Plan E was changed to
Plan F.

On April 1, 2010, Taxpayer A retired. On March 23, 2012, Taxpayer A withdrew
her account balance in Plan F. The distribution included her pre-tax and after-tax
contributions. The pre-tax portion of her account was to be paid from Plan F to
Financial Institution H to be placed in a traditional Individual Retirement Account
(“IRA”). The after-tax portion of her account was to be paid to her to be rolled into
Roth IRA G. The Form 1099-R for 2012, prepared by Financial Institution I,
reported after-tax employee contributions of Amount 4, also in error. Amount 4
equaled the sum of the erroneous after-tax employee contributions reported in
2006 (Amount 3) and Taxpayer A's actual after-tax employee contributions
(Amount 2). Taxpayer A’s 2012 federal income tax return was filed in accordance
with the Form 1099-R, showing Amount 4 as Taxpayer A’s after-tax contributions
to Plan F, and therefore was reported as being non-taxable.

In December of 2013, Company C notified Taxpayer A that the after-tax
contribution amount, Amount 3, reported in 2006 had been overstated, and the
error was carried forward. In addition, the after-tax contribution amount reported
on Form 1099-R for 2012 was also erroneous. Financial Institution I issued a
corrected Form 1099-R for 2012 which shows Amount 2, Taxpayer A's actual after-
tax contributions. The erroneous computation of Taxpayer A’s after-tax employee
contributions in 2006 and 2012 resulted in an erroneous roll over of Taxpayer A’s
pre-tax contributions of Amount 3 to Roth IRA G. The ruling request is
accompanied by a letter from Company C which states that when it was Company
B, Financial Institution H erred when calculating Taxpayer A's after-tax employee
contributions in 2006 and this error was carried forward to 2012. In addition,
Financial Institution I further erred in reporting Taxpayer A’s after-tax contributions
in 2012.

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Because of the incorrect reporting of Taxpayer A’s after-tax contributions, at the
time Taxpayer A rolled Amount 3 into her Roth IRA G, she was unaware of the
need to recharacterize the contribution of Amount 3 as having been made to her
traditional IRA in accordance with section 408A(d)(6) of the Code.

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 contribution of Amount 3 to Roth
IRA G (plus earnings on that amount) as a contribution made to her traditional
IRA.

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.

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,

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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.

In this case, due to circumstances beyond her control, Taxpayer A was unaware
she needed to elect to recharacterize the contribution of Amount 3 as having been
made to her traditional IRA in accordance with section 408A(d)(6) of the Code.

With respect to Taxpayers’ request for relief, and based on the information and
representations submitted, the Service has concluded that Taxpayer A has met the
requirements of clauses (i), (ii) and (iii) of section 301.9100-3(b)(1) of the
regulations and that granting relief would not prejudice the interests of the

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Government. Therefore, Taxpayer A is granted a period of 60 days from the date
of the issuance of this letter ruling to recharacterize Amount 3 (plus earnings on
that amount) in Roth IRA G to her 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.

This ruling is based on the assumption that the traditional IRA and Roth IRA G
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.

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 (I.D. # ), ,at( )

Sincerely yours,

Manager
Employee Plans Technical Group 1

Enclosures:
Deleted Copy of this Letter
Notice 437

cc: