Recharacterizing Failed Conversions- After The Usual Deadline

[Guest Shelton]

Enlightening article from Barry Picker- see the follwing link

http://www.bpickercpa.com/articles/failed.....conversion.htm

[Guest reg_h2b]

"The Statute of Limitations for timely filed 1998 tax returns will expire on April 15, 2002. Some taxpayers with improper 1998 Roth conversion may think that they will be home free if the IRS does not contact them by that date. However, there is no statute of limitations on the Service determining that the Roth IRA is improper. "

What is the techinical reason why there is no statute of limitations on a Roth Conversion. In other words, why isn't it subject to the usual 3 year/6 year (>20%) statute of limitation rule since the conversion is based on the individual's MAGI? I can see if fraud can be shown by the service but I don't think that's what your talking about.

Is the principal the same for the deductibilty of the contribution (ie no limitation period). (I would think not since I'm told for corporate qualified plan contributions the limitation period is 3 years from the company's filing date.)

[BPickerCPA]

An improper Roth is an improper Roth. That determination can be made at any time. The SoL on penalties only run if the penalty form (5329) is filed. Hence, IRS can disallow the Roth and impose the early withdrawal and excess contribution penalties.

[Guest reg_h2b]

Can you file the Form 5329 with $0 penalities due just to start the Clock on the statute of limitation?

What would be the reason for an audit of a tax year over 6 years old since-- it's my understanding-- the audit couldn't change your MAGI (assuming no fraud)? Doesn't the IRS actually have to change (increase) your MAGI for the tax year in question to invalidate your Roth? Or is the point, if caught after 3 years and the change is less than 20% you owe no taxes on the additional income on the 1040 but are still liable for penalties and you can only have penalties if the conversion was improper.

If an audit's possible in theory how likely is it in practice (after 6 years). I talked to one of the Roth Reg writters who implied that after 6 years the Service had no power to deem it an improper conversion. It was a casual conversation so I don't take it as gospel; but it was clearly said.

I know a lot of people who had big Roth conversions in 1998 and who qualified but reported a MAGI in the $90-$99K region with rather complicated tax forms. It seems disproportionate that if they had a small, honest error in their conversion year that could possibly destroy their entire IRA; accumulated throughout their lives. I'd be surprised; but not shocked.

Useful discussion.