Spouses received time to recharacterize excess Roth IRA contributions

Plain-English summary

A married couple contributed to Roth IRAs during years when their modified adjusted gross income exceeded the eligibility limit. They discovered the problem after the ordinary deadlines for recharacterizing the contributions had passed and sought relief before the IRS identified the failures. The IRS found that they acted reasonably and in good faith and that relief would not prejudice the government. Each spouse received 60 days to transfer the affected contributions and allocable net income to a traditional IRA.

Ruling snapshot

• Question: Should the spouses receive additional time to recharacterize ineligible Roth IRA contributions as traditional IRA contributions?
• Outcome: approved, with each spouse given 60 days to complete a compliant trustee-to-trustee transfer
• Key authorities: IRC § 408A(d)(6); Treas. Reg. §§ 1.408A-5, 301.9100-3

Full text (IRS public release)

201932019

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

MAY 15 2019

UIL No.: 9100.00-00

T:EP:RA:T1

Legend:

Taxpayer A = [redacted]

Taxpayer B = [redacted]

Roth IRA C = [redacted]

Roth IRA D = [redacted]

Financial Institution E = [redacted]

Financial Institution F = [redacted]

Amount 1 = [redacted]

Amount 2 = [redacted]

Amount 3 = [redacted]

Dear [redacted]:

This is in response to a letter dated March 6, 2019, submitted on your behalf by your
authorized representative, in which you request rulings under section 301.9100-3 of the
Procedure and Administration Regulations (the “Regulations”).

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The following facts and representations have been submitted under penalty of perjury in
support of your requests.

Taxpayer A was the owner of a Roth IRA, Roth IRA C, which was maintained by
Financial Institution E. For tax years [redacted] and [redacted] through [redacted], Taxpayer A made
annual contributions to Roth IRA C in an amount no greater than Amount 1. Taxpayer
A’s total contributions made to Roth IRA C for years [redacted] and [redacted] through [redacted]
equaled Amount 2.

Taxpayer B, Taxpayer A’s spouse, was the owner of Roth IRA D, which was maintained
by Financial Institution F. For tax years [redacted] through [redacted], Taxpayer B made annual
contributions to Roth IRA D in an amount no greater than Amount 1. Taxpayer B’s total
contributions to Roth IRA D for years [redacted] through [redacted] equaled Amount 3.

On September 10, [redacted], Taxpayer B attended a retirement seminar in which the
speaker mentioned the modified adjusted gross income limit for contributions to Roth
IRAs. After the seminar, Taxpayer A and Taxpayer B began researching the issue and
reviewing their past income. They discovered that from [redacted] through [redacted], their
modified adjusted gross income exceeded the limits for Roth IRA contributions.
However, the deadlines had passed for recharacterizing their Roth IRA contributions for
these years. Taxpayer A and Taxpayer B sought professional tax advice which led to
this request for relief.

Taxpayer A and Taxpayer B file jointly and represent that for tax years [redacted] through
[redacted], they timely filed their federal income tax returns. They also represent that this
request was filed before the Internal Revenue Service (the “Service”) discovered the
failure to make an election to recharacterize their Roth IRA contributions. Taxpayer A
and Taxpayer B are not seeking to recharacterize their Roth IRA contributions as
deductible traditional IRA contributions. The contributions made for years [redacted] through
[redacted] and the net earnings on these contributions have been retained in Roth IRA C
and Roth IRA D.

Based on the facts and representations submitted, Taxpayer A requests an extension
of time to recharacterize the Roth IRA contributions made to Roth IRA C for tax years
[redacted], and [redacted] through [redacted] which total Amount 2, as having been made to a
traditional IRA pursuant to section 1.408A-5 of the Federal Income Tax Regulations
(the “I.T. Regulations”) and section 301.9100-3 of the Regulations.

Based on the facts and representations submitted, Taxpayer B requests an extension
of time to recharacterize the Roth IRA contributions made to Roth IRA D for tax years
[redacted] through [redacted] which total Amount 3, as having been made to a traditional IRA
pursuant to section 1.408A-5 of the I.T. Regulations and section 301.9100-3 of the
Regulations.

With respect to your ruling requests, section 408A(d)(6)(A) of the Internal Revenue
Code (the “Code”) provides that except as provided by the Secretary, if, on or before

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the due date for any taxable year, a taxpayer transfers in a trustee-to-trustee transfer
any contribution to an individual retirement plan made during such taxable year from
such plan to another individual retirement plan, then, for purposes of this chapter, such
contribution shall be treated as having been made to the transferee plan (and not the
transferor plan).

Section 408A(d)(6)(B)(i) of the Code provides that subparagraph (A) shall not apply to
the transfer of any contribution unless such transfer is accompanied by the net income
allocable to such contribution.

Section 408A(d)(7) of the Code defines the due date, for purposes of this subsection, to
mean the due date prescribed by law (including extensions of time) for filing the
taxpayer’s return for such taxable year.

Section 1.408A-5, Q&A-1 of the I.T. Regulations provides 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 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 section further provides that this
recharacterization election generally must occur on or before the date prescribed by
law, including extensions, for filing the taxpayer’s federal income tax return for the tax
year of the contribution.

Section 1.408A-5, Q&A-2 of the I.T. Regulations requires that the net income
attributable to the amount of a contribution being recharacterized must be transferred to
the other type of IRA along with the contribution.

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 Roth IRA
contribution: (1) the taxpayer must notify the Roth IRA trustee that the taxpayer has
elected to recharacterize the contribution, (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
transfer the contribution and the net income allocable to the contribution.

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

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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)) to establish that (1) the
taxpayer acted reasonably and in good faith, and (2) the grant of 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)
inadvertently 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)(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 (taking into account the
time value of money).

Section 301.9100-3(c)(1)(ii) of the Regulations provides that ordinarily the interests of
the Government will be treated as prejudiced if the 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 this case, Taxpayer A and Taxpayer B requested relief before the failures to make
timely elections to recharacterize their Roth IRA contributions were discovered by the
Service. Thus, Taxpayer A and Taxpayer B are deemed to have acted reasonably and
in good faith because they satisfy the requirements of section 301.9100-3(b)(1)(i) of the
Regulations.

In addition, Taxpayer A and Taxpayer B are not seeking relief to file amended returns
for closed years and granting relief will not result in Taxpayer A and Taxpayer B 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.

With respect to Taxpayer A’s ruling request, 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

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date of this letter to recharacterize the contributions made to Roth IRA C for tax years
[redacted] and [redacted] through [redacted], which total Amount 2, as contributions to a traditional
IRA. The recharacterization must otherwise satisfy applicable rules, including that the
net income attributable to the contributions must be transferred to the traditional IRA.

With respect to Taxpayer B’s ruling request, we rule that, pursuant to section 301.9100-
3 of the Regulations, Taxpayer B is granted a period not to exceed 60 days from the
date of this letter to recharacterize the contributions made to Roth IRA D for tax years
[redacted] through [redacted], which total Amount 3, as contributions to a traditional IRA. The
recharacterization must otherwise satisfy applicable rules, including that the net income
attributable to the contributions must be transferred to the traditional IRA.

This letter assumes that the above traditional IRAs and Roth IRAs qualify under Code
sections 408 and 408A, respectively, 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.

If you wish to inquire about this ruling, please contact [redacted], at
[redacted].

Sincerely yours,

Adam P. Zaebst, Acting Manager
Employee Plans Technical Group 1

Enclosures:
Deleted copy of letter
Notice 437

cc: