Roth contributions when MFS
We have a financial planning client that we just realized has filed MFS from 2009 thru 2011, and made Roth IRA contributions for 2010, 2011, and 2012. When we spoke to their CPA, his opinion was to let it ride, as he has seen many of these over the years and never seen the IRS challenge one. If they would challenge it, then we could amend the returns to MFJ and pay the additional tax of approximately $450-500 per year as a result of the change in filing status. Has anybody seen the IRS challenge this situation? What was the result? An additional question…If we decide to go back and reverse these Roth contributions for 2010, 2011, and 2012, I know that the window is still open to reverse 2011 and 2012 without any incident. Are there any repercussions to reversing 2010 since that return has long been filed? The CPA seems very comfortable in his recommendations….I’m just looking for an additional level of comfort from an independent source…. Thank you!
Permalink Submitted by Bruce Steiner on Thu, 2012-03-22 15:17
It would cost far more than $500 for the client’s lawyer to research the question and come up with a recommendation. Your suggestion to change to a joint return may be the most practical solution, assuming there was no other important reason for filing separate returns.
Permalink Submitted by Alan Spross on Thu, 2012-03-22 17:03
If client does not have a TIRA balance, the 2011 and 2012 Roth contributions can be recharacterized as non deductible TIRA contributions and converted immediately thereafter (too late for 2010). If client does have a pre tax TIRA balance the conversion would be mostly taxable, but that could be compared with the additional cost of filing jointly. Starting in 2010 a Roth conversion can be done for MFS taxpayers, but not a regular contribution.
The IRS is very inconsistent with contacting taxpayers regarding excess contributions. Since there is no statute of limitations for excess contributions and the 6% excise tax is annual, it leaves the taxpayer with no closure date with respect to IRS inquiry. Further, if these contributions were the first Roth contributions, the 5 year clock does not start to run. It starts only when the first allowable Roth contribution is made, but that includes a conversion.
Permalink Submitted by Peter Lingane on Thu, 2012-03-22 17:51
I doubt that the CPA has considered the implications for the 2012 return. While the taxpayer is not required to volunteer to file late Forms 5329 since the failure to pay the excise tax was inadvertent, not filing a Form 5329 for 2012 after the error has been discovered would appear to be fraudulent on the part of both the taxpayer and tax preparer.
The options I see are to remove the excess 2010 contribution or to amend the filing status on the 2010 return; remove or recharacterize the excess 2011 contribution or amend the filing status on the 2011 return; remove or recharacterize the 2012 contribution or plan on filing MFJ for 2012. Letting things ride is not an option.
Permalink Submitted by Scott Garrison on Thu, 2012-03-22 18:18
Alan – Thanks for the input! Both husband and wife have pre-tax TIRAs. On the husband’s Roth, his is all straight contributions. The wife’s Roth was started with a rollover, then annual contributions thereafter. So, I believe the five year clock is running on the wife, but not the husband. In regard to the IRS notices, what are the repercussions of receiving a notice? 6% excise tax per year for each contribution? Any additional penalty or interest? I didn’t realize that there is no statute of limitations in this regard…thank you for that information!
Peter – Thank you as well for your input! Much appreciated!
Permalink Submitted by Alan Spross on Thu, 2012-03-22 18:32
If and when the IRS catches the 2010 excess, they would bill 6% for 2010, 2011 etc for each year plus retroactive interest for late payment of the 6% for the older years. The 2011 and 2012 contributions can easily be corrected if they do not change over to joint filing. And if they amend to joint returns, they cannot change their mind and amend back to MFS.
If they recharacterize or remove their 2011 and 2012 contributions, and file a 5329 for 2010, they will also need a 5329 for 2011 since they incurred a second 6% penalty for 2011 on the 2010 excess. But there would be no need to show the 2011 and 2012 excess amounts if they were recharacterized or removed on a timely basis. The deadline for 2011 is 10/15/2012 and they must either file their 2011 return OR an extension by 4/17 to be able to use the extended due date of 10/15.
Permalink Submitted by Peter Lingane on Thu, 2012-03-22 18:59
Pub 590 says that 301.9100-2 applies; therefore there is no need for an extension to be allowed to use the extended due date.
Reg. 301.9100-2(b) grants “an automatic extension of 6 months from the due date of a return excluding extensions to make regulatory or statutory elections whose due dates are the due date of the return or the due date of the return including extensions provided the taxpayer timely filed its return for the year the election should have been made and the taxpayer takes corrective action as defined in paragraph (c) of this section within that 6-month extension period. This paragraph (b) does not apply to regulatory or statutory elections that must be made by the due date of the return excluding extensions.”
Permalink Submitted by Alan Spross on Thu, 2012-03-22 23:30
Right, it requires EITHER the return filed by 4/17 or an extension filed by that same date. In other words, if nothing is done as of 4/17 there is no extended due date and the regular due date applies.