RECHARACTERIZATION TAX REPORTING

You did your recharacterization from the Roth IRA back to the traditional IRA and now you are wondering how you put this on your tax return so you don't have to pay tax on the conversion. You can find guidance from IRS on the instructions for Form 8606 - which in most cases you don't have to file when you do a recharacterization. You can find these instructions at www.irs.gov. On the left hand side of the screen, click on "Forms and Publications."

1099-R
You will have a 1099-R from the traditional IRA for the distribution you converted and a 1099-R from the Roth IRA for the recharacterization. The distribution amount will go on line 15a of Form 1040. On line 15b, you will put a zero and an "R" for rollover. You must attach a note to the return saying that you have done a recharacterization. You will give the amount and the date of the conversion and the amount and the date of the recharacterization.

Form 5498
You will have a Form 5498 from the Roth IRA conversion and one for the recharacterization. These are informational only and you do not need to attach them to your return.

Form 8606
Generally you only need to file this form if you have any after-tax amounts in any IRA you own.

If you do the conversion and the recharacterization in the same year, you will have all your tax reporting done in the same year and things are easy. If you convert in one year and recharacterize in the next, your tax reporting will also span two years. You will still follow the above instructions for your return (or your amended return).

However, you will not have the 1099-R from the recharacterization to attach to the return. The note that you attach will cover you and on your return for the following year you ignore the 1099-R from the recharacterzation.

PRIVATE LETTER RULING 201015038:

A taxpayer we will call "Patrick" took a distribution from his IRA to cover potential expenses from a business he was purchasing with his spouse. "Patrick" was told that he would have until year-end to redeposit his IRA distribution.

"Patrick" closed the business purchase without using the IRA distribution funds and was prepared to return them to his IRA within two weeks. "Patrick" made several attempts to meet with a representative of the Financial Institution, but the meeting continually was pushed back.

"Patrick" accomodated these rescheduling requests based on the initial guidance provided by the Financial Institution. He finally met with a representative eight days after the end of the 60-day period and was shockingly (at least to him) told it was too late to return the funds.

After "Patrick" filed a claim, the custodian settled. Then "Patrick" filed the PLR request which was granted by IRS and "Patrick" was given an extension of time to complete the rollover.

IRA Technical Consultant Beverly Deveny's take:

Had "Patrick" needed to use the funds while they were out of the account, it is unlikely that this Private Letter Ruling would have been granted.

If the custodian had admitted their errors, the rollover could have been accomplished without the necessity for a PLR under the automatic extension provision of Rev. Proc. 2003-16.