by Denise Appleby CISP, CRC, CRPS, CRSP, APA
A Taxpayer who misses the deadline for completing a recharacterization may have some recourse, if the failure to meet the deadline was caused by the IRA custodian. In private letter ruling (PLR) 200903105, the IRS provided a Taxpayer with an extension of sixty days from the date the PLR was issued, to complete a recharacterization. This extension was granted despite the fact that the original deadline for completing the recharacterization had long passed. For information about recharacterizing a conversion, see Roth Conversion Lost Value? Nullify it by Recharacterization!
In PLR 200903105, the Taxpayer – who filed a joint return with her husband-completed a 2006 Roth conversion which she felt was OK to do, as their income was under the $100,000 modified adjusted gross income (MAGI) limit. The couple filed an extension (for the deadline to file their 2006 tax return), because they had not yet received several Form K-1s for the year. After receiving the K-1s, they filed their tax return and realized that the K-1s resulted in their MAGI exceeding the $100,000 limit, which meant they were ineligible for the Roth conversion and were therefore required to have it recharacterized. Because they intended to recharacterize the conversion, they did not include the conversion on their tax return.
The Financial Institution’s Error
Prior to filing their tax return, the Taxpayer contacted an officer of the IRA custodian (referred to as Officer-D for this purpose), and explained that she would be ineligible for the Roth conversion because of the K-1 income. Officer-D told her to wait until the tax return was finalized, before making a decision about recharacterizing the Roth conversion. Officer-D included a typical disclaimer about the custodian not being a tax advisor- and to consult with a tax advisor to determine the “best course of action”
The Taxpayer contacted Officer-D again, and reiterated that there was no way their income could be reduced below the $100,000 limit. Up until this time, neither the Taxpayer nor Officer-D was aware that the deadline for completing the recharacterization was October 15, 2007 and as a result, neither of them made any effort to meet this deadline.
Sometime after the October 15 deadline, the Taxpayer completed the recharacterization paperwork. It was then that the operations department of the custodian informed Officer-D that the deadline for completing the recharacterization had passed, and they were therefore unable to process the recharacterization.
The Request to the IRS
On December 11, 2007, the Taxpayer- through her tax professional- submitted a request to the IRS for an extension of the deadline to complete the recharacterization, on the assumption that the extension could be granted under Sections 301.9100-1 and 9100-3. Section 301.9100-1 gives the IRS Commissioner the authority to grant the Taxpayer an extension of the deadline for completing recharacterization. Section 301.9100-3 generally provides, in part, that requests for relief will be granted when the Taxpayer provides the evidence to establish to the satisfaction of the Commissioner that the Taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Federal Government.
The IRS’ Response
The IRS granted the Taxpayer’s request for reasons which include the following:
- The request was made to the IRS, before the IRS discovered that the request was not processed,
- The tax year was not yet closed, and
- Granting the extension would not prejudice the interest of the government, with relation to revenues
Under the terms of the approval, the Taxpayer had 60-days from the date the IRS issued the letter of approval to complete the recharacterization.
- This case demonstrates the importance of keeping good documentation on communications made with financial institutions. Where possible, such communications should be made via e-mail, fax or other traceable mail. In cases where communication is verbal, it should be followed up with an e-mail or fax, confirming any agreement. Something as simple as “as per out conversation at 10:30 on January 15, you stated that you would …” As much of the relevant details as possible should be included.
- Another important point of note is that the IRS is more receptive to making concessions or exceptions when the out-of-compliance Taxpayer approaches them before they find out about the malfeasance. Taxpayers who find themselves in such positions should consult with their tax professional, for guidance on taking the correct approach.
Note: A PLR cannot be cited as law or precedence and can be relied on only by the party to whom it is issued. However, it gives a good idea of how the IRS may respond to a case with a similar fact pattern