Taxpayer receives 60 days to undo an unintended Roth conversion

Plain-English summary

A taxpayer instructed a financial institution to place an after-tax contribution in a new traditional IRA and later move only that amount to a Roth IRA. The institution instead deposited the contribution into an existing traditional IRA and converted the entire account, including pre-tax funds, to the Roth IRA. The taxpayer believed the transactions had been handled correctly and reported the full distribution as nontaxable, learning of the unintended conversion only after receiving an IRS notice of deficiency. The IRS found that the taxpayer was unaware of the need to recharacterize the pre-tax amount and had reasonably relied on a tax professional who failed to advise him about the election. It granted 60 days to transfer that amount, plus earnings, from the Roth IRA back to the traditional IRA.

Ruling snapshot

• Question: May the taxpayer receive more time to recharacterize the unintended portion of a Roth IRA conversion?
• Outcome: Approved, with a 60-day extension
• Key authorities: IRC § 408A(d)(6); Treas. Reg. §§ 1.408A-5 and 301.9100-3

Full text (IRS public release)

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

JAN 27 2016

COMMISSIONER
TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

UIL No.: 9100.00-00

T:EP:RA:T2

Legend:

Taxpayer A =

Traditional IRA B =

Roth IRA C =

Financial Institution D =

Amount 1 =

Amount 2 =

Amount 3 =

Dear                 :

This is in response to a letter dated July 22, 2015, as supplemented by correspondence
dated October 1, 2015, November 10, 2015, December 3, 2015, and January 5, 2016,
in which your authorized representative requests relief under section 301.9100-3 of the
Procedure and Administration Regulations (the “Regulations”) on your behalf. You
submitted the following facts and representations in connection with your request.

Taxpayer A owned a traditional IRA, Traditional IRA B, which was maintained by
Financial Institution D. Taxpayer A represents that in January of 2013, he instructed
Financial Institution D to deposit Amount 2 into a new traditional IRA account as an
after-tax contribution. However, Financial Institution D mistakenly deposited Amount 2
into Traditional IRA B. After the contribution, Taxpayer A’s Traditional IRA B held pre-

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tax contributions and earnings equal to Amount 1, and Amount 2, with a total balance
equal to Amount 3. Believing that Amount 2 had been deposited into a separate IRA,
Taxpayer A requested that Amount 2 be rolled over into a new Roth IRA Account, Roth
IRA Account C. Financial Institution D, however, misunderstood Taxpayer A’s
instructions and converted Traditional IRA B into Roth IRA C by transferring Amount 3,
the entire balance in Traditional IRA B, to Roth IRA C.

In February 2014, Taxpayer A received a Form 1099-R from Financial Institution D
which reported the total distribution from Traditional IRA B equal to Amount 3. The
distribution code on the Form 1099-R identified in Box 7 was “2,” indicating that an
exception for an early distribution applied. Based on the form, Taxpayer A believed that
the rollovers had been properly made, and he and his tax preparer indicated on
Taxpayer A’s 20__ 1040 federal Income Tax Return that the distribution of Amount 3
was not taxable. Taxpayer A first learned that Amount 1 had been rolled over into Roth
IRA C when he received a Notice of Deficiency from the Service.

Based on the above facts and representations, you request an extension of time in
which to recharacterize Amount 1 back into Traditional IRA B by a trustee-to-trustee
transfer of Amount 1 plus earnings thereon to Traditional IRA B pursuant to section
301.9100-3 of the Regulations.

With respect to your request for relief under section 301.9100-3 of the Regulations,
Code section 408A(d)(6) and section 1.408A-5, Q&A-1 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 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 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

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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 if the taxpayer (i) requests relief under section
301.9100-1 before the failure to make a timely election is discovered by the Service; (ii)
failed to make the election because of intervening events beyond the taxpayer’s control;
(iii) failed to make the election because, after exercising reasonable diligence, the
taxpayer was unaware of the necessity for the election; (iv) reasonably relied upon the
written advice of the Service; or (v) 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 and documentation submitted in this case are consistent with Taxpayer
A’s assertion that he did not intend to convert Traditional IRA B into a Roth IRA and that
given the Form 1099-R he received from Financial Institution D, he was unaware that
Amount 1 had been rolled over into Roth IRA C. Taxpayer A also relied on his
professional tax preparer to prepare his return for the 20__ year. His tax professional
did not advise him that Amount 1 was a taxable distribution and he failed to inform
Taxpayer A of the election that could have been made under section 408A(d)(6) of the
Code and section 1.408A-5 of the I.T. Regulations. Thus, Taxpayer A was unaware of
the necessity of making the election. Taxpayer A’s failure to recharacterize Amount 1 in
Roth IRA C on or before the date prescribed by law, including extensions, for filing
Taxpayer A’s 20__ Return, was caused by Taxpayer A’s reasonable reliance on a
qualified tax professional, who failed to advise Taxpayer A to make the election. Under
the set of circumstances in this case, Taxpayer A satisfies the requirements of section
301.9100-3(b)(1)(iii) and (v) of the Regulations.

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Accordingly, we rule that, pursuant to section 301.9100-3 of the regulations,
Taxpayer A is granted a period not to exceed 60 days from the date of this letter to
recharacterize Amount 1 plus earnings from Roth IRA C back to Traditional IRA B.

This letter assumes that the above IRAs qualify under Code section 408 and 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
a power of attorney on file with this office.

Should you have any concerns regarding this ruling, please contact                 ,
                  at                 .

Sincerely yours,

Carlton A. Watkins, Manager
Employee Plans Technical Group 1

Enclosures:
Deleted copy of letter
Notice 437

cc: