Is there a penalty for improper Roth Conversion

[Guest Gary Borkan]

I have converted my Traditional IRA to a Roth IRA for 2000 based on my AGI being less than $100,000. If the IRS were to determine (say through an audit)in the future that my income was actually over 100,000 for the year of conversion, would there be any financial penalty for the improper conversion. Am I right in presuming I would have to recharacterize the Roth back to a traditional IRA, and would be refunded the taxes that I mistakenly paid. But would there be any penalty?

[BPickerCPA]

The deadline for recharacterizing a year 2000 conversion is 10/15/2001. Any audit would take place after that date, I presume. You would therefore need special IRS permission to do a recharacterization. Whether they would grant it would depend greatly on the circumstances that caused the audit to bring your income over $100K.

If the recharacterization was permitted, there would be no penalty and you would get your taxes on the conversion refunded.

If the recharacterization was not permitted you would owe 10% tax on the early withdrawal of the IRA, you would have to remove all the money from the roth and could not put it back into an IRA so you have no retirement account, and you would owe 6% per year penalty for excess contribution to the roth until the money was withdrawn. All in all, not a pretty picture.