Mistaken Roth deposit may be recharacterized as traditional IRA rollover

Plain-English summary

A former employee directed retirement-plan savings to a newly opened traditional IRA, and the rollover check identified that account. The financial institution mistakenly deposited the money into the taxpayer's Roth IRA, while Form 1099-R reported a nontaxable direct rollover and gave the taxpayer no reason to know about the error. The mistake was discovered years later after the institution merged with another firm. Although the affected tax year was closed, the IRS found that relief would not lower the taxpayer's total tax liability and that the error was beyond the taxpayer's control. It granted 60 days to recharacterize the Roth IRA into a traditional IRA.

Ruling snapshot

• Question: Should the taxpayer receive more time to correct a financial institution's mistaken deposit of a direct rollover into a Roth IRA?
• Outcome: Approved, with 60 days to recharacterize the account as a traditional IRA
• Key authorities: IRC § 408A(d)(6); Treas. Reg. §§ 1.408A-5 and 301.9100-3

Full text (IRS public release)

201627008
DEPARTMENT OF THE TREASURY

INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND APR 06 2016

GOVERNMENT ENTITIES
DIVISION

UIL No.: 9100.00-00

Legend:

Taxpayer A =

Plan B =

Roth IRA C =
Roth IRA D =

Financial Institution E =
Financial Institution F =

Amount 1 =

Dear

This is in response to a letter dated November 9, 2015, as supplemented by
correspondence dated March 22, 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.

Prior to 2001, Taxpayer A participated in Plan B, a qualified plan that included a cash or
deferred arrangement under section 401(k) of the Internal Revenue Code (“Code”). In
2001, after leaving employment with his employer, Taxpayer A established a traditional
IRA with Financial Institution E for purposes of rolling over his retirement savings in
Plan B, equal to Amount 1. Taxpayer A completed the paperwork and a check was
issued to the “Financial Institution E TR IRA” for the benefit of Taxpayer A. The
custodian of Plan B issued a Form 1099-R for the          taxable year that identified the

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taxable amount as zero and the distribution code G, which relates to a direct rollover to
an IRA. Based on the Form 1099-R, Taxpayer A believed that the contribution had
been made to his traditional IRA and did not include Amount 1 in his gross income for
the          year. However, Financial Institution E mistakenly deposited Amount 1 into
Taxpayer A’s Roth IRA C.

Subsequently, Financial Institution E merged with Financial Institution F, and Roth IRA
C became Roth IRA D. When Taxpayer A was reviewing his retirement plans with a
financial advisor from Financial Institution F, Taxpayer A discovered that Financial
Institution E had mistakenly credited Amount 1 to Roth IRA C, and that Amount 1 was
now held in Roth IRA D.

Based on the above facts and representations, you request an extension of time in
which to recharacterize Roth IRA D into a traditional IRA 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 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 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


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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 intended to roll over Amount 1 from Plan B to a traditional IRA and
that Financial Institution E mistakenly credited Amount 1 to Roth IRA C. Because
Taxpayer A received a Form 1099-R that reflected the intended rollover into a
traditional IRA, Taxpayer A was not aware that Amount 1 had been contributed to a
Roth IRA, and was thus not aware of the need to make the election under section
408A(d)(6) and section 1.408A-5 of the I.T. Regulations. Taxpayer A’s failure to
recharacterize Roth IRA C on or before the date prescribed by law, including
extensions, for filing Taxpayer A’s Return, was caused by Financial Institution E’s
failure to follow Taxpayer A’s instructions and honor the traditional IRA identified on the
check from Plan B, and Taxpayer A’s reliance on the information provided in the Form
1099-R, which was consistent with his instructions. Taxpayer A has requested relief
under section 301.9100-1 of the Regulations before the failure to make a timely election
was discovered by the Service. Therefore, under the set of circumstances in this case,
Taxpayer A satisfies the requirements of section 301.9100-3(b)(1)(i) and (ii) of the
Regulations.

In addition, although the statute of limitations is closed, since this request was filed
timely and granting relief will not result in Taxpayer A having a lower tax liability in the
aggregate for all taxable years affected by the election than Taxpayer A would have
had if the election had been timely made, granting relief under section 301.9100-3 of


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the Regulations will not prejudice the interests of the government.

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 Roth IRA D into a traditional IRA.

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: