ROTH RECHARACTERIZATION
I have a client who has a net operating loss carryover from a prior year which keeps his agi below $100,000 and allows him to do a conversion. If the loss is subsequently disallowed under audit, he would not qualify. The occurence of an audit would most likely be far beyond the normal time for recharacterizing the conversion. It is my understanding that a private letter ruling would have to be obtained in this situation to allow converting back to a regular ira and there is no guarantee it would be allowed. Has anyone had experience with this or have any suggestions.
Permalink Submitted by Alan Spross on Fri, 2007-12-07 04:10
I can’t help you with respect to his chances letter ruling success, but the high cost of making the request, now around 10,000 needs to be considered before making the conversion. Obviously, the merits of the amount of the NOL also need to be assessed prior to filing the return and/or making the conversion.
Without a favorable PLR, he would have to correct the failed conversion under the same rules as an excess regular contribution. Doing this after the extended due date requires taking an early withdrawal from the Roth IRA under the ordering rules with respect to taxation. The early withdrawal penalty may also apply as well as the 6% excise tax for each year the excess contribution remained uncorrected. This all sounds like a difficult and high stakes decision.
Permalink Submitted by Bruce Steiner on Fri, 2007-12-07 04:48
There have been quite a few favorable private letter rulings allowing late recharacterizations where the taxpayer subsequently found out that his/her income was over $100,000. There is no way to know the likelihood of getting a favorable ruling because when the IRS would issue an unfavorable ruling, they give the taxpayer the option to withdraw the ruling request, and most taxpayers withdraw the ruling request rather than have the IRS issue an unfavorable ruling. But from the facts set forth in the existing rulings, I would think that the chances of getting a favorable ruling are good if the taxpayer in fact had no way to know that his/her income would be increase on audit to over $100,000.
In addition to the $10,000 (or approximately $10,000) fee for a ruling request, there will be at least several thousand dollars in legal fees to apply for a ruling.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL