Possible Additional Relief For Incorrect Roth Conversions

[Guest jamesfdavis]

Here's a story by Kathy M. Kristof in the business section of the 4/10/99 L.A. Times (www.latimes.com) on incorrect Roth conversions (i.e. too much AGI). According to Kristof's IRS source, you still may be able to recharacterize and file an amended return, even if you have already filed your regular return:

"After receiving "a few hundred" tax returns in which taxpayers

improperly converted traditional IRAs to Roths, the IRS says

taxpayers may "re-characterize" these transactions to avoid penalties--but

must do it quickly.

Taxpayers may not convert a traditional IRA to a Roth in a tax year in

which their income--married or single--exceeds $100,000. If they do,

they are subject to income taxes and a 10% penalty on the converted

amount. However, if they simply erred, they can undo the

conversion--that's "re-characterization" in tax-speak--by putting the

money back into a traditional IRA before Thursday's deadline, the IRS

said. Taxpayers who receive a filing extension have until Aug. 15 to undo

a conversion without penalty.

As for the taxpayers who improperly converted Roths in filings already

received by the IRS: "I can only guess that they didn't read the directions,"

said Don Roberts, an IRS spokesman in Washington.

Taxpayers who have already filed but now realize that they were not

allowed to convert their IRA should file a 1040X amended return."

[This message has been edited by jamesfdavis (edited 04-10-99).]

[BPickerCPA]

It's true that a taxpayer who has already filed and whose income is over $100K must recharacterize the conversion and file an amended return, this must all be done prior to 4/15/99. If you've already filed you cannot get an extension.

[Bruce Steiner]

If you file a second return before the due date, it's not really an amended return, but rather it becomes the original return, in place of the first one.

The real problem will arise in a year or two when people who thought their income was under $100,000 and converted to Roth IRAs find out on audit that their income was over $100,000. This could happen, for example, if someone is a partner in a partnership and the partnership's income is increased on audit.

The proposed regulations on Roth IRAs don't offer any help. The IRS felt constrained by the statute, as amended in 1998. We'll have to wait and see if the § 1.9100 regulations offer any relief.

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL