Roth Conversion Tax
If a client has been on extension and are deciding to keep their conversion is there a late payment penalty. It seems like a no to me since you also have the option of deferring the income over 2011 and 2012. Thank you!!
If a client has been on extension and are deciding to keep their conversion is there a late payment penalty. It seems like a no to me since you also have the option of deferring the income over 2011 and 2012. Thank you!!
Permalink Submitted by Peter Lingane on Fri, 2011-10-07 15:52
If the tax liability shown on the return when filed is more than the amount paid by April, there is a “failure to pay” penalty of 0.5% per month and there is interest. The might also be an “underpayment” penalty if withholding and/or estimated tax were insufficient prior to April. See Publication 17 for details.
Permalink Submitted by mk foss on Fri, 2011-10-07 17:00
Last year the CalCPA Society had a meeting with IRS and asked this question: If someone did a Roth conversion in 2010, when is the income considered to be included for purposes of calculating underpayment penalties in 2011 and 2012?
The answer was that the income from the 2010 conversion would be considered as included ratably during the year for each year.
Some people were elated because they were afraid that IRS would consider the income reportable in the first quarter of 2011 and 2012 and others were disappointed saying that no income should be considered for 2011 until October 17 has passsed.
I believe that you’re wondering what would happend if someone converted in 2010, does not recharacterize and elects out of reporting it 1/2 in 2011 and 1/2 in 2012. As Peter said there would be interest and possibly penalties when the return is filed in October 2011. For underpayment penalty purposes, it seems you could consider the income as occurring in the fourth quarter but that doesn’t help with the amounts due with an extension in April.