excess older ROTH IRA contributions
For excess ROTH IRA contributions going back several years where the deadline to correct has passed, looking for guidance in choosing between withdrawing contributions and paying 6% penalty (and likelihood of IRS waiving or reducing this penalty) or appealing for an extension to recharacterize (ala IRS letter rulings 201932019, 201930027).
Permalink Submitted by Alan - IRA critic on Tue, 2021-04-20 20:41
I looked at the latter PLR and underlying activity. A PLR costs roughly 20k, so no one should apply for one unless they have a highly convincing fact pattern such as in this case. Further, since a late recharacterization granted is likely to include multiple years of earnings transferred to the TIRA, in which they now will eventually be taxable, is the cost and effort worth it? It is also noteworthy that the IRS has the same data as the apparent negligent tax preparer and they did nothing to levy the excise tax before they piled up for years, so perhaps they have established a very low bar to allow extended recharacteriztions.
A taxpayer would have to determine the actual dollar amounts involved in potential recharacterizations. That would include how they will recover the IRA basis, other than pro rata many years later. The IRS billing of late interest on excise taxes is also a factor in paying the tax late, and it is not possible to know if the IRS will bill such late interest or not.
At some point, despite there being no SOL for excess contributions, a taxpayer would have to consider that the IRS has not been at all active in levying these excise taxes, and the farther back this goes, the less likely to suffer consequences. At that point, there are many taxpayers that decide to play the audit lottery. That’s a personal decision for which I have no recommendation.