In 2000, client converted her traditional Roth IRA to a Roth IRA and elected to spread the income over 4 years.
In 2000, her then CPA told her to recharacterize the Roth back to the traditional IRA in order to avoid paying the taxes. (Of course, we know that it was too late then, as the deadline was 12/31/1999)


Client has now enlisted the services of another CPA , who has informed her that the transaction was not legitimate because of the date it was done – it was done in 2000.

The client wants the custodian to reverse the recharacterization and make it like it never happened. The client claims the recharacterization is invalid.

What is the custodian’s responsibility here, since the custodian carried out the client’s written instructions to process the recharacterization?

Doesn’t the IRS state that a recharacterization is irrevocable? This would mean that the transaction couldn’t be reversed. A trustee or custodian cannot just simply reverse a transaction because the client comes back and say ‘oops’, I shouldn’t have …, because the transaction is not within the parameters of the regulations. The client must accept responsibility for the transaction and if there are any penalties or loss of benefits, try to recoup the expenses from the CPA who provided the erroneous information.

How much money is involved? It may to get an IRS private ruling that the invalid recharacterization can be reversed. Otherwise, I agree with TaxWoman.