Roth Recharacterization Documentation
Situation: On 12/30/10 I converted $100,000 from a traditional IRA to a Roth IRA. On 4/15/11 I filed an extension. On 9/21/11 the Roth had dropped to $67,000 and I decided to recharacterize the entire amount. On 10/13/11 I filed my 2010 return; however, I neglected to note the recharacterization on the return resulting in a Form 8606 being filed. I did not pick up on the error until I started preparing my 2011 return the other day. I immediately amended the 2010 return and mailed it off. I am concerned that the IRS will not receive my amend 2010 return until after it has received my 2011 return (I’ll be e-filing this) and it will be looking for the tax due on the converted amount. I received a 1099-R for the $67,000 (recharacterized amount) which I will include on the 2011 return.
My questions are……
(1) Should I note somewhere on the 2011 return that I had recharacterized the entire 2010 conversion and amended my 2010 tax return (which it should receive shortly) so that’s why the converted amount is not reported on my 2011 return?
(2) If yes to Question #1, where on my 2011 return do I put such a note?
(3) Since a 1099-R was issued in 2010 for the original $100,000 conversion amount and a 1099-R was issued in 2011 for $67,000 representing the entire recharacterized amount, do I need to explain the difference in values on my 2011 return? This was a recharacterization of the full conversion amount. The discrepancy on the amounts was attributed to the account losing value and not that it was a partial recharacterization.
Thank you.
Permalink Submitted by Alan Spross on Thu, 2012-04-12 04:44
1) It can’t hurt, but the IRS will also have the 1099R indicating a recharacterization of the 2010 conversion. Actually, you should have made the explanatory statement on the 2010 1040X since that is the year of the conversion that was erased, but since the 1040X is gone making notation on the 2011 might head off an inquiry.
2) It depends on the program you are using. Explanatory statements are commonplace for retirement plan distribution issues, so any decent program should have this facility. If there is a limited field you might have to abbreviate.
3) This is part of the info that should have been included on the 1040X. That form asks why you are amending, so are you sure you did not include an explanation there? If you did, and cannot figure a way to include an additional statement with your 2011 return, don’t let that stop you from e filing 2011 without adding any conversion income on line 15b.
Even if the IRS sends you an inquiry, you have all the documentation to respond to it. People get inquiries all the time on recharacterizations even when they filed everything correctly. The IRS does not send out inquiries for several months and by that time they should have everything matched up, so I would not worry too much about this having already filed the 1040X.
Permalink Submitted by Shelly Rostosky on Thu, 2012-04-12 20:12
Thank you for your answer. I did provide an explanation regarding the recharacterization on the 2010 1040x. I was just trying to head off an inquiry from the IRS (should there be one) if it had received my 2011 return before it had received the 1040x with the explanation. I appreciate your input!