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I was told I could recharacterize my 2010 ira conversion to

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a Roth Ira until the...
I was told I could recharacterize my 2010 ira conversion to a Roth Ira until the tax was due. I just tried to recharacterize and was told it was too late. I will now owe $300,000 in taxes over the next 2 years which I do not have. Do I have any options or recourse. This was an honest mistake.
Submitted: 5 years ago.Category: Tax
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6/2/2012
Tax Professional: socrateaser, Lawyer replied 5 years ago
socrateaser
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 39,382
Experience: Retired (mostly)
Verified
There is no option to do what you are trying to accomplish. If you are now stuck with an absurdly high tax liability, and there are funds remaining in the IRA, then you may have to use those assets to pay the taxes. If you have already spent the money, then your only option would be to file an offer in compromise with the IRS and try to reduce the tax liability.

If you want to see if an offer in compromise (OIC) can help you, then here is a free calculator that can give you a rough idea of where you stand. Assuming that the OIC is workable, then see this link for the offical forms.

Hope this helps.

NOTICE: My goal here is to entertain while educating the public about the law. Your positive feedback to the website is appreciated. If you need to contact me again, please put my user id at the beginning of your question ("To Socrateaser"), and the system will send me an alert. Please Click the following link for IMPORTANT LEGAL INFORMATION. Thanks and best wishes!

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Tax Professional: Robin D., Senior Tax Advisor 4 replied 5 years ago
Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 15,890
Experience: 15years with H & R Block. Divisional leader, Instructor
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Hello,

With respect to the above advice there is a section of the IRC that allows the commissioner, at his discretion, to extend the time to recharacterize an IRA. You would need to file and request the extension but if you are granted the extension based on the circumstances of your not meeting the time you would not be penalized.

I offer you the following link to read, it is a ruling that was issued for the specific individual and although you cannot use the specific ruling for yourself it explains how they were able to receive the relief:
http://www.irs.gov/pub/irs-wd/1204027.pdf

It is wordy but look to the page 4 info as it gives the reasons the commissioner allowed the relief.

I hope this info is useful to you and advise that you go over the info with your tax professional.

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Tax Professional: socrateaser, Lawyer replied 5 years ago
Perhaps I misinterpreted, your original facts. You stated that "I just tried to recharacterize and was told it was too late." I assumed that you were "told" by the IRS. If yes, then under Treas. Reg. 301.9100-3(b)(1)(i), you would be presumed to have not acted in good faith, and you would be denied the recharacterization.

Also, the Private Letter Ruling, offered by my colleague does not disclose the entire list of issues that must be satisfied in order to obtain relief under the regulatory section. In particular, Subsection (c)(1)(i) provides that the IRS will not grant relief if it would "...result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money)." What is interesting about this is that the Private Letter Ruling appears to ignore this "prejudice factor" entirely. This could be due to the revenue officer's inadvertence, or it could indicate a liberal interpretation of the regulation on the part of the IRS in favor of granting relief wherever the opportunity exists.

Given all of the above, and assuming that I misunderstood your original facts, you may actually be able to obtain relief under Section 301.9001-3 -- but, only if you can very carefully maneuver all of the obstacles provided for by the regulation. So, I echo my colleague's suggestion that you consult with a competent tax professional in carefully drafting your request for relief.

Hope this helps.

NOTICE: My goal here is to entertain while educating the public about the law. Your positive feedback to the website is appreciated. If you need to contact me again, please put my user id at the beginning of your question (“To Socrateaser”), and the system will send me an alert. Please Click the following link for IMPORTANT LEGAL INFORMATION. Thanks and best wishes!

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socrateaser
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