Taxpayer receives 60 days to recharacterize a Roth IRA contribution

Plain-English summary

A married taxpayer made Roth IRA contributions for several years before learning that the couple's income exceeded the applicable contribution limits. The taxpayer had relied on a tax return preparer who did not advise her about those limits, and the IRS had not independently discovered the missed recharacterization elections. The taxpayer did not seek deductions or amended returns for the closed years. The IRS found that she acted reasonably and in good faith and that relief would not prejudice the government's interests. It granted her 60 days to transfer the specified Roth IRA contribution and its earnings to a traditional IRA.

Ruling snapshot

• Question: May the taxpayer receive extra time to recharacterize an excess Roth IRA contribution as a traditional IRA contribution?
• Outcome: Approved, with a 60-day period from the ruling date 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)

201603048

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

OCT 21 2015

COMMISSIONER
TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Uniform Issue List: 9100.00-00

LEGEND:

Taxpayer A =

Taxpayer B =
Tax Preparer C =
Company D =

Roth IRA X =
Amount 1 =

Dear

This is in response to your letter dated April 1, 2015, submitted on your behalf, by
your authorized representative, in which you request a ruling under section 408A of the
Internal Revenue Code (the “Code”) and under section 301.9100-3 of the Procedure
and Administration Regulations (the “Regulations”).

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

Taxpayer A and Taxpayer B, (referred to collectively as the "Taxpayers") are married
and file joint returns. In 2002, Taxpayer A established Roth IRA X, with Company D.
Taxpayer A represents that she is the title holder of Roth IRA X. Taxpayer A funded
Roth IRA X with a contribution equal to Amount 1, which was to be allocated to the 20__
tax year. Taxpayer A made monthly contributions to Roth IRA X for tax years 20__
through 20__. For tax years 20__ through 20__, Taxpayer A’s contributions to Roth
IRA X did not exceed the annual Roth IRA contribution limits and no reductions applied
due to the Taxpayers’ modified adjusted gross income for those years.

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. The CPA also
discovered that in 2005, the Taxpayers’ contribution amount exceeded the phased out
Roth IRA annual contribution limit. Tax Return Preparer C, who had prepared the
Taxpayers’ returns from 19__ through 20__, did not inform the Taxpayers of any income
limitations for contributing to Roth IRAs. Acting on the advice of their CPA, Taxpayer A
timely recharacterized her 2012 contribution to Roth IRA X as a contribution to a
traditional IRA by a transfer to a traditional IRA account with Company D.

Taxpayer A did not discover that there were problems with her eligibility to contribute
to a Roth IRA until after the deadline for making timely recharacterizations for 2005
through 2011, 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 IRA X as contributions to a traditional IRA for 2005 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 a traditional IRA. The assets have
never left Roth IRA X. The Internal Revenue Service (the “Service”) has not
independently discovered Taxpayer A'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 be granted a period not to exceed
60 days from the date of this letter ruling to recharacterize the excess contributions to
Roth IRA X for tax years 20__ through 20__.

With respect to your ruling request, section 408A(d)(6) of the Code 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 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 a contribution to a
Roth IRA as having been made to a traditional IRA the taxpayer must notify the Roth
IRA trustee of the taxpayer's intent to recharacterize the amount; 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 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) if the taxpayer reasonably relied upon the written advice of the Service; or
(v) if 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
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 301.9100-3(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.

In the present case, Taxpayer A did not become aware of the fact that the
contribution to Roth IRA X for the 2005 tax exceeded the phased out Roth IRA
contribution limit, and that the contributions to Roth IRA X for years 2006 through 2011
exceeded the level at which contributions to Roth IRAs are permitted, until after the
deadlines for making timely recharacterizations had passed. Therefore, Taxpayer A
was unaware of the necessity of making the election. Further, Taxpayer A represents
that she relied upon Tax Preparer C to advise her regarding the ability to make Roth
IRA contributions, and Tax Preparer C did not inform her 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, 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 of the Regulations.

Under the set of circumstances described above, Taxpayer A satisfies 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. Thus, 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 is granted a period not to exceed 60 days from the date of
this letter ruling to recharacterize the contribution of Amount 1 to Roth IRA X, and the
net income earned on Amount 1, as a contribution to a traditional IRA.

This letter assumes that the above IRAs qualify under either section 408 or section
408A of the Code 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 has been sent to your authorized representative in accordance
with your authorization on file in this office.

If you wish to inquire about this ruling, please contact to at

Please address all correspondence
.

Sincerely yours,

Carlton A. Watkins, Manager
Employee Plans Technical Group 1

Enclosures:
Notice of Intention to Disclose

Deleted copy of this letter

Cc: