Failed Roth conversion subject to penalty???

[Guest Paul Leslie]

Take this for what it is worth. On the front page of the Wall Street Journal (Wednesday, November 29, 2000) and I quote "Now being sought: Private letter rulings for people who failed to recharacterize their Roth IRAs on time and now face huge fines or penalties."

Anyone heard about any recent private letter ruling actually being issued on this topic? If the IRS does abate the penalties, that would be a huge break for taxpayers and show a kinder and more gentle IRS.

[BPickerCPA]

To my knowledge, none of the rulings have been issued yet. I have a few pending, and I understand that they should be out within a couple of weeks.

[Guest reg_h2b]

We just talked to the IRS on this issue last week. We were told:

1. The service has received alot of "failed recharacterization" ruling requests this year.

2. The PLR's will be written by one IRS employee to make sure they are treated on a consistent basis.

3. This issue currently stands with the IRS's General Counsels Office. Only when they give some direction can the PLR's be finalized.

4. The IRS representative our office talked to was skeptical as to whether we would have a decision by 12/31/2000.

This issue brings up several critical questions which I do not know the answer to...I'd be interested to get some response as to the following questions:

A. If this ruling is delayed past 12/31/2000 would we still be responsible for any additional 6% excessive contr. penalties caused by the delay (assuming it's ruled a failed rechar.)?

B. If there were MRD's due by 12/31/2000 how would those be affected by any ruling delay.

Additionally I would be interested in descriptions of these "failed recharacterizations" that you know about:

i.Why did they fail?

ii. Was a proper and timely election made and the trustee just failed to act on that election? Or was the actually election made after the deadline?

iii. What reasons for relief did you give in your ruling request?

Paul,I completely agree that this would be most appreciated if the Service would grant relief as to this recharaterization deadline.

The problem, as you both no doubt know, is with the way the reg's. for 408A were written. If you belatedly discover in good faith that you made a mistake on your MAGI and it's over 100k and you made a ROTH conversion for that tax year your IRA is no more! (plus you've got excise taxes to pay). This may be a small penalty if you made a 2K contribution but what if you made a large conversion? Then you've made an extremely costly mistake under the current reg's.

I don't know what the IRS G.C. is deciding on now, but I'd like to think that in the future the IRS would amend this reg. to at least let someone not lose the tax-deferred status of their entire IRA.

Reg_h2b