IRS denies late Roth IRA recharacterization relief

Plain-English summary

A taxpayer converted a traditional IRA to a Roth IRA and later tried to recharacterize it after an adviser raised the conversion's cost. The financial institution did not complete the request, and the taxpayers did not report the Roth conversion or amend their return. They sought an extension only after receiving an IRS notice of deficiency, by which time the Roth assets had declined because of alleged fraud. The IRS found that they had known about the need to recharacterize in time, had not shown an event beyond their control or qualifying reliance, and requested relief after the IRS discovered the failure. It also found insufficient proof that the request was not based on hindsight and denied the extension.

Ruling snapshot

• Question: Could the taxpayers receive more time to recharacterize the Roth IRA conversion back to a traditional IRA?
• Outcome: Denied.
• 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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

JUN 01 2016

201635013

UIL No.: 9100.00-00
SE:T:EP:RA:T1

Legend:
Taxpayer A =

Taxpayer B =

IRA C =
Roth IRA D =

Financial Institution E =

Company F =
Amount 1 =
Dear

This is in response to a letter dated January 15, 2016, as supplemented by
correspondence dated March 31, 2016, and April 13, 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 and her spouse, Taxpayer B (“Taxpayers”), file a joint federal income tax
return. Taxpayer A owned IRA B, which was maintained by Financial Institution E.
Taxpayer A represents that on the advice of Company F, she converted traditional IRA
C into Roth IRA D on December 27, 2012. In February of 2013, Company F
recommended that Roth IRA D be recharacterized back into a traditional IRA due to the
cost of the conversion. On April 13, 2013, Taxpayer A submitted a request to Financial
Institution E for a withdrawal from Roth IRA D, and checked the box “recharacterization”

2 201635013
as the reason for the distribution. On December 4, 2013, however, Taxpayer B received
notice from Financial Institution E that the recharacterization request could not be
processed without filing an application for a traditional IRA and paying a fee. Taxpayer
B represents that he paid the fee and again submitted a request to recharacterize Roth
IRA D. On June 12, 2014, Taxpayer B received further correspondence from Financial
Institution E stating that it would re-open the traditional IRA account in order to
effectuate the recharacterization.

Taxpayer A and Taxpayer B represent that they filed their 1040 Tax Return for the

year on a timely basis; however, they did not report the Roth IRA conversion on
that return. The Taxpayers did not file an amended return for the year to reflect
the conversion. On August 18, 2014, the Taxpayers received a Notice of Deficiency
from the IRS regarding the conversion into a Roth. After receiving the notice, Taxpayer
A submitted this request.

Taxpayer A states that the initial reason for converting her traditional IRA into a Roth
IRA was because of anticipated large returns on her investments. Subsequently, the
assets in Roth IRA D declined in value due to alleged fraud. Taxpayer A argues that
the fraudulent and illegal activities were outside of her control, as was Financial
Institution E’s rejection of the request to recharacterize Roth IRA D back to a traditional
IRA.

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


3 201635013
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 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(b)(3) of the Regulations provides that for purposes of paragraph
(b), a taxpayer is deemed to have not acted reasonably and in good faith if the taxpayer
uses hindsight in requesting relief. If specific facts have changed since the due date for
making the election that make the election advantageous to a taxpayer, the IRS will not
ordinarily grant relief. In such a case, the IRS will grant relief only when the taxpayer
provides strong proof that the taxpayer's decision to seek relief did not involve
hindsight.

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 do not support Taxpayer A’s
assertion that she satisfies the criteria in section 301.9100-3(b)(1) of the Regulations.

4 201635013

Taxpayer A and Taxpayer B requested relief after the Service discovered that Roth IRA
D had not been recharacterized back into a traditional IRA, and Taxpayer A and
Taxpayer B were aware of the necessity of the election in February of 2013, which gave
them time in which to make a timely election to recharacterize. Taxpayer A and
Taxpayer B have not established that there were any intervening events beyond their
control, and there was no reliance on a qualified tax professional or on the written
advice of the Service.

Section 301.9100-3(b)(3) of the Regulations provides that if the facts have changed
since the due date for making the election that make the election advantageous to the
taxpayer, the IRS will grant relief only when the taxpayer provides strong proof that the
request for relief is not based on hindsight. Strong proof was not submitted in this case.

Accordingly, we are unable to grant an extension of time in which to recharacterize
Roth IRA D pursuant to section 301.9100-3 of the Regulations.

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

Carlton A. Watkins, Manager
Employee Plans Technical Group 1
Enclosures:
Deleted copy of letter
Notice 437

cc: