3 yrs of conversion recharcterized in one request
I have a client that has converted in the past 3 years and have not paid taxes. Is that possible? Does IRS allow 3 yrs to pay taxes? are there new laws regarding this in 2009? also if everything they have converted from IRA to roth IRA they want to recharacterize back to their traditional IRA could they just do all 3 yrs of conversion in one transaction of recharaterization or is it best to do partial recharacterization for each conversion?
Permalink Submitted by Anonymous (not verified) on Thu, 2009-02-19 22:47
Paying no taxes is only possible if the taxpayer’s taxable income including the conversion is absorbed by exemptions, deductions or other losses. It could also be possible that the taxpayer has a high basis of non deductible contributions. There is no IRS rule allowing the taxes to be deferred otherwise, so it could be the taxpayer owes a considerable amount of back taxes. Note that in 2010 only, conversions done that year can be reported 50% in 2011 and 50% in 2012, but that does not apply to the past conversions done here.
There is still time to recharacterize the 2008 conversion which will erase both the conversion and the taxes due. However, the taxpayer is stuck with the prior conversions and will have to amend prior returns to include them. There will also be interest charged on the back taxes. If the taxpayer needs to withdraw amounts from the Roth to pay the taxes, the distributions will probably be tax free because the taxes are deemed paid on Roth conversions even if the distribution is being used to cover the taxes.