Married taxpayers get 60 days to recharacterize excess Roth IRA contributions

Plain-English summary

A married couple made monthly contributions to several Roth IRAs, then learned that their income had exceeded the eligibility limits in multiple years and that one earlier contribution exceeded the phased-out annual limit. Their longtime return preparer had not told them about the income restrictions. The couple timely recharacterized their 2012 contributions, but the deadlines for earlier affected years had already passed. They asked for a 60-day extension to move those contributions, with earnings, to traditional IRAs and did not seek deductions or amended returns for closed years. The IRS found that they acted reasonably and in good faith, filed before the IRS discovered the failure, and would not obtain a lower aggregate tax liability. It granted the requested 60-day extension.

Ruling snapshot

• Question: Could the taxpayers receive extra time to recharacterize ineligible Roth IRA contributions as traditional IRA contributions?
• Outcome: Approved
• Key authorities: IRC § 408A(d)(6); Treas. Reg. §§ 1.408A-5 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

201511022
DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

DEC 15 2014

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

[illegible]

Legend:

Taxpayer A =

Taxpayer B =

Tax Preparer E =

Company D =

Roth IRA X =

Roth IRA XX =

Roth IRA XXX =

Roth IRA Y =
Roth IRA YY =

Dear

This is in response to your letter dated October 11, 2013, as supplemented by a letter
dated November 20, 2013, and an email dated December 15, 2014, submitted on your
behalf, by your authorized representative, in which you request a ruling under section

-2- 201511022

408A of the Internal Revenue Code (Code) and under section 301.9100-3 of the
Procedure and Administration Regulations (Regulations).

The following facts and representations have been submitted in support of your request.

Taxpayer A and Taxpayer B, (referred to collectively as “Taxpayers”) are married and
file joint returns. Taxpayer A established Roth IRA X, Roth IRA XX and Roth IRA XXX
and Taxpayer B established Roth IRA Y and Roth IRA YY in March 1999 with Company
D. Taxpayer A represents that he is the title holder of Roth IRA X, Roth IRA XX and
Roth IRA XXX. Taxpayer B represents that she is the title holder of Roth IRA Y and
Roth IRA YY. The Taxpayers’ initial contributions to the Roth IRAs were allocated to
the 19: tax year. Taxpayer A and Taxpayer B made monthly contributions to the Roth
IRAs from 1999 through 2012. In March of 2013, Taxpayer A and Taxpayer B met with
a CPA to develop a comprehensive retirement plan. The CPA determined that from
2006 through 2012 the Taxpayers had income over the limits for Roth IRA contributions
and in 2005 their contribution exceeded the phased out Roth IRA annual contribution
limit. The Taxpayers had never been informed of any income limitations for contributing
to Roth IRAs by Tax Return Preparer E who had prepared their returns from 19

through 20° . Acting on the advice of their CPA, the Taxpayers timely recharacterized
their 2012 Roth IRA contributions as contributions to traditional IRAs by transfers to
traditional IRA accounts with Company D.

Taxpayer A and Taxpayer B did not discover that there were problems with their
eligibility to contribute to a Roth IRA until after the deadline for making timely
recharacterizations for 20| through 20’ , as prescribed in section 408A(d)(6) of the
Code. The Taxpayers were advised by their attorney to request a ruling for an
extension of time to recharacterize the contributions to Roth IRAs as contributions to a
traditional IRA for 20 . through 20° . The Taxpayers did not request to amend
previously filed tax returns for tax years 20( to 20’ to claim a deduction for
contributions to traditional IRAs. The assets have never left the Roth IRAs.

The Internal Revenue Service (Service) has not independently discovered Taxpayer A's
and Taxpayer B’s failure to make a timely recharacterization.

Based on the above facts and representations, you request a ruling that, pursuant to
section 301.9100-3 of the Regulations, Taxpayer A and Taxpayer B be granted a period
not to exceed 60 days from the date of this letter ruling to recharacterize the
contributions for tax years 20: to 20 to Roth IRA X, Roth IRA XX, Roth IRA XXX,
Roth IRA Y and Roth IRA YY as contributions to a traditional IRAs.

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

201511022

-3-

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 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 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.

Section 301.9100-3(c)(1)(i) of the Regulations provides that the interests of the
Government are prejudiced if granting relief would result in a taxpayer having a lower

-4- 201511022

tax liability in the aggregate for all taxable years affected by the election than the
taxpayer would have had if the election had been timely made.

Section 301.9100-(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.

In the present case the taxpayers did not become aware of the fact that their income for
the tax years 201 “through 20’ exceeded the level at which contributions to Roth IRAs
are permitted until after the deadlines for making timely recharacterizations had passed.
Therefore, the Taxpayers were unaware of the necessity of making the election.

Further the Taxpayers represent that they relied upon Tax Preparer E to advise them
regarding their ability to make Roth IRA contributions, and Tax Preparer E did not
inform them about the income limits or raise the fact that the Taxpayers’ income had
exceeded the limits. Upon realizing the need to make the election, Taxpayer A and
Taxpayer B, in a timely manner, and before the Service discovered the failure to make
the election, submitted this request for relief under section 301.9100-3.

Under the set of circumstances described above, Taxpayer A and Taxpayer B satisfy
the requirements of section 301.9100-3(b)(1) of the Regulations, clauses (i) and (v). In
addition, although the statute of limitations is closed for most of the years involved, the
taxpayers are not seeking relief to file amended returns for closed years and granting
relief will not result in the taxpayers having a lower tax liability in the aggregate for all
taxable years affected by the election than they would have had if the election had been
timely made, we find that under section 301.9100-3(c)(1) of the Regulations, granting
relief will not prejudice the interests of the Government.

Accordingly, Taxpayer A and Taxpayer B are granted granted a period not to exceed 60
days from the date of this letter ruling to recharacterize the contributions to Roth IRA X,
Roth IRA XX, Roth IRA XXX, Roth IRA Y and Roth IRA YY as contributions to
traditional IRAs.

This letter assumes that the above IRAs qualify under either Code section 408 or Code
section 408A 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
your authorization on file in this office.

-5- 201511022

If you wish to inquire about this ruling, please contact _ I.D. # , at ( ) -

Sincerely yours,

[illegible]
Laura B. Warshawsky, Manager
Employee Plans Technical Group 3

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

cc: