Possible Extension of Time to Recharacterize Roth IRA Conversion

[Guest Bill Angell]

We are generally operating under the automatic extension as provided in IRS Announcement 99-57 to allow an IRA to be recharacterized in most situations until the tax return due date plus extensions which is October 15 for most years. (There was a special IRS Announcement 99-104 that extended the due date to 12/31/1999 but that was a one year only extension that no longer applies.)

However, there is still the posibility of requesting from IRS an extension of time to recharacterize under certain conditions as is shown in Private Letter Rulings 200116053, 200116057, and 200116058.

The gist of these rulings is that IRS may grant an extension of time to recharacterize if:

(1) Each taxpayer was either ignorant of the rules for qualifying for a Roth IRA conversion, or reasonably assumed that a responsible financial institution or professional had properly recharacterized the conversion on time;

(2) Upon realizing the error, each taxpayer took immediate steps to remedy the situation and asked the IRS for relief;

(3) The tax year of the improper conversion was not a "closed" tax year.

The regulation that permits IRS to grant these special extensions requires that the taxpayer "acted in good faith." Acting in good faith is assumed (1) if a request for relief is filed before the failure to make a timely election is discovered by the IRS; (2) if the taxpayer failed to make the election because of intervening events beyond his or her control; (3) if after exercising reasonable dilligence, the taxpayer was unaware of the necessity for the election; (4) the taxpayer relied on written advice from IRS; or (5) the taxpayer relied on the advice of a qualified tax professional.

Private Letter Rulings may not be relied on but are merely an indication of IRS's thinking in a particular situation. The services of a qualified tax professional should be sought out.

[BPickerCPA]

PLR 200116058 was the ruling that I obtained for a client. The most important thing to keep in mind is that the taxpayer has to go to the IRS first. The impression I got from dealing with the IRS was that this was the key. If they find you did not have a valid conversion, it will probably be too late to obtain relief.