2010 Roth conversion undone by future amend
I did a substantial Roth conversion in 2010 electing to pay the taxes in 2010. Recently the economy has claimed my employed status and due to local job conditions I anticipate a likely extended period of zero income well into or even through 2012. If this is what plays out, when I file 2012 taxes could I amend my 2010/11 taxes to change my 2010 election and have the conversion spread over 2011/12 (I estimate this would save about $12,000)? If yes, would the fact that 2011 (or 2012) taxes were underpaid as a result of the amendments trigger a penalty?
Permalink Submitted by Alan Spross on Tue, 2011-11-08 22:31
Unfortuneately, the extended due date for changing the election you made on Form 8606 expired on 10/17/2011 and is now basically irrevocable.
There is an alternative, but it is expensive and time consuming. Am not sure it is worth it for 12k. The alternative would be to apply for an IRS private letter ruling requesting a “super-extended due date” to recharacterize your conversion or to change your “opt out” election on Form 8606. If your conversion has a loss, recharacterization has more historical precedent since the deferral election only happened in 2010. If you can document your job loss, the chance of a successful ruling is pretty good, but the cost and delay are drawbacks.
Under the circumstances any underpayment penalties are very small in comparison. I think you would get some interest on your 2010 tax payment refund that would offset much of the 2011 penalty if there was one.