Roth IRAs--IRS Admits Rules were incorrect

[Guest Christine]

Official cite: IRS Announcement 99-57

[Guest Christine]

On May 27th The Wall Street Journal published an article entitled "IRS Admits Rules on Roth Accounts Were Incorrect on April 15 Deadline". It states that "...any investor who filed a return on or by April 15 has until Oct. 15 to change a Roth back to a traditional IRA." I can find no IRS Announcement/Notice/etc. relating to this. If you know of any official pronouncement by the IRS, please send cite. Thanks.

[Kathy]

First of all, thanks for pointing this out - this is the kind of stuff that helps us all look like shining stars! So, I read the article (probably wouldn't have gotten to it until Saturday if you hadn't pointed it out) and I'm still confused. Although the IRS did neglect to tell people that they could recharacterize after 4/15/99 if they extended their tax return, the basic info they gave seems pretty on target to me. I went back and read the regs again and they clearly say "This recharacterization election can be made only if the trustee-to-trustee transfer from the first IRA to the second IRA is made on or before the due date (including extensions) for filing the individual's Federal income tax return for the taxable year for which the contribution was made to the first IRA." Now, I know that for minimum funding purposes (section 412) we treat everyone as if they filed for an extension on their tax return, even if they didn't. Is that what the IRS is saying here? I think maybe the IRS was too conservative in its first statement and now the Wall Street Journal might be slanted more the other direction. Or, maybe there is a later announcement out there that we both missed - it could happen!

[Kathy]

Thanks Christine! I was totally unaware (should I admit that in writing?) of the rules to which the IRS referred in that announcement until now. I appreciate your looking into it further!

[BPickerCPA]

I have not seen the WSJ article, but I did read the Announcement. The IRS is not really admitting that they made an error. What they did was find a loophole and determine that taxpayers could use it. Otherwise there are a bunch of taxpayers out there who missed the deadline who would be facing whopping penalties and taxes, as well as loss of IRA tax deferral.

Look at the regs cited in the Announcement, Reg 301.9001. It doesn't only apply to this case. It may save your behind some day.