Problem with Roth Conversion

[WhiteOleander]

T/P had bonds worth 70000 transfered fron his Trad IRA to a Roth IRA in 2005. He received a letter from IRS that he could not convert to the Roth because his income was over 100,000 that year.

He contacted the IRS and said that he did not mean for the trust that handles the IRA to open a Roth. So, the IRS said OK, no problem and dropped the tax and penalties due. He does not have a letter stating this, but, he says when he calls, they do not show there is a debt for him.

So, he cannot recharacterize the distribution because it is beyond the time limits. So, this is a fialed conversion. Page 13-14 of TTB states that he must pay the 6% excise penalty and include the 70000 into his income.

T/P states he should not have to since the IRS says that the tax is not due.

Anybody have any bright ideas that may help this guy?

[taxmandan]

You should get his '05 information from e-services and see what activity there was by theIRS with correspondence and any changes to the account. This will tell you if what he says is reflected in the record. Does he have papers from the trust that the conversion was their error and they corrected the information sent to theIRS? I don't consider phone conversations with IRS as adequate that there is no tax owed, theIRS has been known to make mistakes in reading their own data.

Daniel

[WhiteOleander]

The company that did the transfer says that they did what was asked. They refuse to make any changes.

I agree that a phone conversation with IRS is not sufficient.

I was asking about anyone knowing of anyway to get it to be considered a recharacterization. From I have seen, it seems the only hope might be to get a PLR. But I do know those cost money.

We did not do the return. The T/P did his own. So, he saved on the tax prep, and now is paying a high price.

[FEDUKE404]

Client loses

He contacted the IRS and said that he did not mean for the trust that handles the IRA to open a Roth. So, the IRS said OK, no problem and dropped the tax and penalties due. He does not have a letter stating this, but, he says when he calls, they do not show there is a debt for him.

This statement bothers me greatly, and seems quite unlikely.

I agree that the company making the transfer is probably faultless.

One thing I have learned about excess contributions, rollovers, recharacterizations, etc is that getting the real facts as to what occurred is difficult, and then finding someone who has knowledge of the procedures is even more difficult. One client got three corrected Forms 1099-R for the same withdrawal, and another got into hot water when the plan administrator said he would reassign prior year (excess) funds and messed up the paperwork.

I think your client is probably stuck with a very large tax bill, to include the penalty. The best he could have hoped for would have been a rollover into another traditional IRA, but that time window has apparently passed. One would think even Turbo Tax or similar would have raised a red flag to him.

[bertrans]

roth

Reliance on oral communication with any level of the Service, plus 50 cents, will buy you a mighty cheap cigar. Really. Get it in writing. Write up a memo of your original question. Good luck.

[Golden Rocket]

Consider the source

He contacted the IRS and said that he did not mean for the trust that handles the IRA to open a Roth. So, the IRS said OK, no problem and dropped the tax and penalties due. He does not have a letter stating this, but, he says when he calls, they do not show there is a debt for him.

Anybody have any bright ideas that may help this guy?

If this guy wants you to help, he should realize that Step 1 is for you to be the "finder of facts." Not sure I fully understand from your post, but apparently he is the only party who believes he did not want a Roth opened. If so, what prompted the trustee to open one? If he didn't want them to open a Roth, what was his purpose in contacting them?

His account of the conversation with IRS also sounds unlikely. I know they don't have the most reliable fountains of knowledge, but a more likely conversation would have the IRS employee checking with a supervisor, or someone knowledgeable.

Not a good business practice to convey suspicion of new customers, but I would certainly tell him I need documentation. He is asking you to wave a magic wand empowered by suspicious information.

[WhiteOleander]

Update

Client states that he did receive some paperwork to sign. Signed it but didn't throughly read it. Then he did receive a 1099R but didn't report it on the original return because he didn't believe he owed tax.

He has decided to go to a tax attorney. I don't think the attorney can be of much help. I read recently that the IRS will not allow you to recharacterize after the time limit if you made a mistake.

So, off he goes.......................................

[Golden Rocket]

Oleander

I can just imagine what a tax attorney is going to tell this guy.

Outwest provided us a good quote a few days ago:

"Nothing is foolproof for a sufficiently talented fool."

What I'm reading into this conversation is that this guy thinks he can do no wrong,
and there are always people for hire to do his bidding for him. And rid him of problems
that he considers mere pestilence.

But when HE is the problem, no matter where he goes, there he is.