CONVERSION, RELAPSE OF STOCK, RECHARACTERIZATION
The issue we have faced with one of our clients is that the client receives a 1099R at the conversion amount. However, when he recharacterizes, because of a drop in value, he gets a 1099R on the recharacterization at a lower amount . The client now has “phantom conversion income” to explain or report because the recharacterization was at a lower value. It is especially a problem when you recharacterize after the end of the year of conversion. How is the best way to handle the “spread” between the conversion amount 1099R and the lower recharacterization amount on the other 1099R.
Permalink Submitted by Alan Spross on Mon, 2009-08-03 23:13
The procedure the IRS recommends here is the explanatory statement that should accompany the return that reports the original conversion. This statement includes the original amount of the conversion, the amount of that conversion that was recharacterized, and the earnings adjusted dollar value that transfers back to the TIRA. The IRS can then more easily square up the return with the information documents that they received.
SInce all recharacterizations as well as timely excess contribution corrections must include an earnings calculation, the IRS expects that the recharacterization figure will be different than the original conversion. The 1099R also contains a coding in Box 7 which identifies the tax year that the recharacterization applies to. For example, a 2008 conversion recharacterized now prior to the extended due date will be coded “R” on the Jan, 2010 issued 2009 1099R. R applies to the year prior to 2009, ie 2008.
A considerable amount of taxpayers neglect to include a thorough explanatory statement, but the IRS usually manages to figure out the 1099R and 5498 forms anyway. If the recharacterized amount appears to be suspiciously low in relation to the year end values of the Roth account involved, they should be inquiring into the figures to be sure that the recharacterization was not a partial recharacterization being passed off as a full recharacterization.