2013 Converstion from Roth to Traditional Following 2010 Conversion from Traditional to Roth: Missed Tax Deduction?

Submitted by Charles Allen on Wed, 2021-04-28 19:39

Hi all, I have read through numerous articles on the conversions rules during the relevant periods and have not been able to find an answer on this, hopefully someone here can help me out.

In 2010, taxpayer converted her traditional IRA to a Roth IRA, received a Form 1099R, and reported the distribution/conversion via a Form 8606 on her 2010 1040. She elected to pay the tax in equal installments in 2011 and 2012, and did so.

In 2013, she elected to convert the account back to a Roth account (I realize you can’t do this now, but my understanding is that it was allowed in 2013). She received a Form 1099-R with the Distribution Code of “R” for 2013. It was listed on her 2013 1040 as an IRA distribution on line 15a but was not reported as taxable. No deduction was taken in 2013 or in any subsequent year related to the conversion from Roth to Traditional.

I have two questions. First, should she have received/taken a deduction in 2013 when she converted the account from a Roth to a Traditional? I believe the answer is yes but I can’t find definitive answer.

Second, if the answer to my first question is yes, she should have taken the deduction in 2013, is there anything she can do now to rectify this situation? The statute of limitations has obviously expired on her 2013 tax year so she may be out of luck there. Perhaps we can convince the account administrator to consider the account to still be a Roth since, for tax purposes anyway, she never received the benefit of the 2013 conversion.

Any thoughts or answers on this are much appreciated. Thanks!



Submitted by Alan - IRA critic on Wed, 2021-04-28 19:59

A 2010 conversion cannot have been recharacterized in 2013, therefore what was recharacterized in 2013 was a regular contribution for 2012 (Code R) that was transferred from a Roth to a TIRA. That TIRA contribution should have been reported as deductible or non deductible on Form 8606 for 2012. If the tax return for 2012 does not show a TIRA deduction, she has made a non deductible contribution for which she can still file a retroactive 2012 8606 reporting a non deductible contribution. That will eliminate double taxation in the future on the contribution.
You are interchanging the terms conversion and recharacterization to some extent. I suppose there could have been a 2012 conversion that was recharacterized back to TIRA, but that would not involve a deduction so I presume what was recharacterized was a regular Roth contribution as a TIRA contribution.
There is no way that the TIRA custodian could change a contribution made several years ago to a different type of IRA. In fact, even back then a recharacterized contribution could not be re -recharacterized, reversing the original recharacterization.  Therefore, the best she can with this situation now is to file a 2012 8606 showing a non deductible contribution to prevent double taxation. Note that she will then have to file an 8606 for every TIRA distribution or conversion until the TIRA is drained. If she wants to avoid that, she could simply do nothing, and her entire TIRA would be treated as pre tax.

Submitted by Charles Allen on Wed, 2021-04-28 20:18

Thank you for the quick and detailed response. I think I might be mixing up the terminology of conversion and recharacterization as you suggest. In 2010, when her traditional IRA had a value of approximately $500K, she completed a “Roth Conversion Form” and switched the account over to a Roth account, paying the tax in 2011 and 2012. Then in July of 2013, she sent in a letter asking to “undo” the Roth conversion and change back to traditional IRA. At this time, the account value was approximately $530K. The account administrator issued her a Form 1099-R for $530K for the 2013 tax year. I note that this 2013 transaction (if you can call that) had nothing to do with any contributions she had made in 2012, it was related to the 2010 “conversion” amount and appreciation of the same from 2010 to July of 2013. So is this 2013 transaction still considered a “recharacterization” in 2012 even though it was not related to a 2012 plan contribution? Thanks again for the time and responses! 

Submitted by Alan - IRA critic on Wed, 2021-04-28 22:42

That’s very strange. The deadline to recharacterize a 2010 Roth conversion was 10/17/2011, and the custodian recharacterized it two years later?  The recharacterization 1099R shows 530,000 and is coded R?  And because of this, did she amend her 2011 and 2012 return (if 2012 has been filed earlier) for a refund that she received?
If this happened due to the custodian error, it’s done now and 8 years later she either benefitted from the error by saving taxes or was hurt because she lost her Roth conversion. So it’s done now either way.
Initially, I did not think a custodian would make this sort of error, but your last post seems to confirm that they did. But this has nothing to do with a deduction, it just restored the Roth conversion back to a TIRA that she had earlier, and when the original TIRA contributions were made prior to 2010, they were either deducted or not deducted. Or she had a 401k or similar funded by pre tax contributions that she rolled to the TIRA creating a rollover IRA. Therefore, the recharacterization of the conversion would not be related to a TIRA deduction, but it might have resulted in a large tax refund if she has paid the taxes on the 2010 conversion. This is also strange enough that it’s possible there is a missing piece to this story.

Submitted by David Mertz on Thu, 2021-04-29 11:33

Also strange is that it’s said that the tax liability on the 2010 Roth conversion was paid over multiple years.  The tax liability on a 2010 Roth conversion would have been entirely a 2010 tax liability.  The tax liability for Roth conversion could not have been spread over multiple years unless there were separate partial Roth conversions in separate years.  If a 2010 tax liability was paid in 2011 and 2012, it would have been by late tax payments subject to penalty and interest, but that doesn’t change the fact that the deadline to recharacterize a 2010 Roth conversion was October 17, 2011.

Submitted by Alan - IRA critic on Thu, 2021-04-29 14:57

2010 conversions defaulted to half the conversion income reported in 2011 and 2012 each – unless taxpayer opted to report it 100% in 2010.  This provision was contained in the 2005 TIPRA tax bill.

Submitted by Charles Allen on Thu, 2021-04-29 15:34

Thanks again for the responses. I think you have the whole picture and there’s nothing missing that I’m aware of. I’ve reviewed it all and discussed with the advisors invovled. Ultimately, she’s in the position where she paid tax on the account via the 2010 Roth conversion but it is now treated as a Traditional account due to the 2013 transaction for which she received no tax benefit, so she will essentially be taxed twice if nothing is done to correc this issue.Perhaps this was a custodian error in allowing her to swap the account back from Roth to Traditional in 2013? I understand the ability to convert from Traditional to Roth and pay the tax, but is there a way to go back once that is done other than if it is a timely recharacterization for prior year contributions? For some reason I thought that you could convert from a Roth to a Traditional back in 2013 though I understand that is no longer the case.

Submitted by Alan - IRA critic on Thu, 2021-04-29 15:56

Definitely a custodian error. P 29 of the 2010 Pub 590 indicates that the recharacterization deadline is 10/15 of the year following the (conversion) contribution. The custodian must have thought that reporting of half the income in 2012 somehow extended the recharacterization date to 10/15/2013. This is incorrect. SInce she wanted to recharacterize, why didn’t she amend her prior returns for a refund of the taxes paid in 2011 and 2012? 
In short, a conversion recharacterization done in 2013 can only have been for a conversion actually done in 2012 or 2013. 
If she had any IRA basis for the 2010 conversion, the recharacterization would have restored that basis to the TIRA, but most likely her 2010 conversion was fully taxable. 
Only other option is to apply for a PLR, but it is not possible to assess her chances of success. PLR average cost is 20k.
Like many other errors, if the IRS had caught this one when they received the incorrect 1099R, this might have a different ending.

Submitted by Charles Allen on Thu, 2021-04-29 20:43

Thanks Alan. It sounds like this was a custodial error. So just to be clear, if a taxpayer set up a Roth IRA and contributed to it in 2010 (or any year prior to 2012 really), and assuming no more contributions were made past 2010, they then could not do a “conversion” or take any other action in 2013 that would make the account be a Traditional account and result in a corresponding deduction? From what I’m reading, the only way to get the 2010 Roth contribution back to a Traditional account would have been a timely recharacterization in 2010 or 2011.

Submitted by Alan - IRA critic on Thu, 2021-04-29 20:49

Yes, that is correct. I don’t understand why the recharacterization was requested in the first place. The only reason to recharacterize (had it been allowed) was to undo the conversion tax bill. So once this recharacterization was processed, why didn’t she amend the 2011 and 2012 returns to get the refund?

Submitted by Charles Allen on Thu, 2021-04-29 20:52

Thanks Alan. I agree, I’m not sure why it was requested and how this slipped through without any tax benefit or amending the returns for so long. I had not involvement in this until about a month ago. I had mentioned a possible PLR at the onset so maybe we’ll go that route and see if we can get lucky. Thanks again for all the responses.

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