In PLR 201218037, the Internal Revenue Service (the Service) addressed whether it would allow taxpayers who converted their SEP and Traditional IRAs to Roth IRAs additional time to re-characterize after their CPA discovered their modified gross income exceeded the limit for conversions, reported the IRAs as re-characterized, but failed to notify the IRA custodian to re-characterize the accounts. The IRS granted the taxpayers 60 days to re-characterize.
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FACTS / LAW
Taxpayer A had a SEP IRA. Taxpayer B had a traditional IRA. In December of 2009, taxpayers converted the accounts to Roth IRAs. The IRAs continued to be maintained by the same company.
While preparing Taxpayers’ tax return Taxpayers’ CPA determined that they were not eligible to convert their IRAs to Roths. Taxpayer’s MAGI exceeded $100,000 and in 2009 taxpayers with a MAGI exceeding $100,000 were not eligible to convert. 408A(c)(3)(C). Taxpayer’s CPA reported the IRAs as re-characterized, but forgot to advise the trustee of the IRAs to transfer the funds back to the old accounts.
The regulations provide guidance regarding when relief can be granted. “The Commissioner, in his discretion, may grant a reasonable extension of the time fixed by a regulation, revenue ruling, revenue procedure, a notice, or an announcement published in the internal revenue bulletin.“ PLR 201218037 (Citing 301.9100-1(c)).
Moreover, if “(1) the taxpayer acted reasonably and in good faith, and (2) granting relief would not prejudice the interests of the Government” applications for relief for requests within 301.9100 will be granted. PLR 201218037 (Citing 301.9100-1(e)(2)).
A taxpayer acts reasonably and in good faith for the purposes of 301.9100-3: (1) if the request for relief is filed before the IRS discovers the failure to make the election, (2) if the taxpayer inadvertently failed to make the election due to events beyond the taxpayer’s control, (3) if the taxpayer was unaware of the necessity to make the election after exercising reasonable diligence, (4) the taxpayer relied in written advice of the service, or (5) the taxpayer relied on the written advice of a tax professional. PLR 201218037 (Citing 301.9100-3(b)(1)).
The interests of the government are ordinarily prejudiced for the purposes of 301.9100-3 and ordinarily the Service will not grant relief when the tax years effected by the election are closed. PLR 201218037 (Citing 301.9100-3(c)(1)(ii)).
ISSUE / RULING
Will the IRS will allow the taxpayers to re-characterize. Since the Taxpayer’s relied on their CPA’s advice, the IRS granted Taxpayers 60 days to re-characterize.
We believe the Service came to the correct conclusion. The Taxpayers relied on their CPA to follow through. Traditionally, the Service has recognized the complexity of the tax code and has allowed taxpayers some deference when they reasonably rely on a tax preparer. This is fair and makes sense.
However, consider the regulations the IRS had to consider before granting the Taxpayer relief. The regulations are complex and default in favor the Service. It’s likely the Service would have been within it privilege to deny relief.
This ruling is a warning to practitioners to maintain and follow your checklists – a small mistake can have large consequences.
I hope this helps you help others.
Robert S. Keebler, CPA, MST, AEP
Cites: PLR 201218037 (02/07/2012)