Individual whose failure to recharacterize was due to attorney’s error was granted extension to recharacterize Roth IRAs back to traditional IRAs

A 60-day extension to recharacterize Roth IRAs as contributions to traditional IRAs was granted to a taxpayer whose failure to timely elect to recharacterize the Roth IRAs was due to incorrect information provided to him by his attorney, according to an IRS letter ruling. The attorney had misunderstood what the taxpayer’s adjusted basis in his traditional IRAs was and did not realize his mistake until after the deadline for recharacterizing the Roth conversions.

On the advice of his attorney, the taxpayer converted his traditional IRAs into Roth IRAs with the understanding that only a certain portion of the converted amounts would be taxed and that the Roth IRA conversions could be recharacterized, if necessary. During the preparation of the taxpayer’s income tax return, the attorney acquired the taxpayer‘s basis in his traditional IRAs from the IRA custodian. The custodian provided the attorney with information showing the total cost basis. The attorney included this amount in the tax return as the adjusted basis for the taxpayer‘s traditional IRAs.

The following year, while reviewing the previous year‘s income tax return in preparation for the filing of the subsequent year’s income tax return, the attorney noticed that the adjusted basis reported on the taxpayer’s Form 8606 (Nondeductible IRAs) appeared to be unusually high. After investigating, the attorney determined that the unusually high figure received from custodian the prior year was not the taxpayer’s adjusted tax basis as reported, but the cost basis of the securities held by the traditional IRAs. The adjusted basis was actually $0. By the time the attorney realized his mistake, the deadline for recharacterizing the taxpayer‘s Roth IRA conversions had expired.

The IRS noted that the information submitted by the taxpayer was consistent with his assertion that, after exercising reasonable diligence, his failure to timely elect to recharacterize the Roth IRAs was caused by his lack of awareness of the necessity of making an election, which was due to reliance upon incorrect information provided by his attorney. Based on the submissions, the IRS determined that the taxpayer met the requirements for relief and that granting the relief would not prejudice the interests of the Government. The taxpayer was granted 60 days from the issuance date of the letter ruling to recharacterize the conversion amounts to traditional IRAs.

Source: IRS Letter Ruling 201320022.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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