Can I reverse my Roth IRA conversion from last year to avoid the tax burden?

Unfortunately, the option to recharacterize (or "undo") Roth IRA conversions was eliminated by the Tax Cuts and Jobs Act starting in 2018. Prior to that change, you could reverse a Roth conversion, but that's no longer possible. That said, you do have some options to manage this tax burden. First, even without the funds on hand, you should still file your tax return on time to avoid additional penalties. The IRS offers installment plans that let you pay over time. For your situation, you could qualify for a long-term payment plan where you make monthly payments until the balance is paid off. You might also consider taking a loan or withdrawal from your Roth IRA to pay the taxes, though this comes with its own implications. If it's been less than 5 years since the conversion, you may face additional penalties on earnings (though not on the converted amounts themselves).

When I faced a similar surprise tax bill after my Roth conversion, I found https://taxr.ai incredibly helpful. I uploaded my conversion documents and tax forms, and their AI analysis identified some offsetting losses and deductions I hadn't considered. In my case, I had some investment losses from the same year that I hadn't properly accounted for, plus they identified an error in how my brokerage reported the conversion. They also gave me a clear breakdown of payment options based on my specific financial situation, which made dealing with the IRS much less stressful.

I was really doubtful about taxr.ai but decided to try it with my similar Roth conversion issue. Surprisingly, it helped me identify about $22,000 in deductions I would have completely missed! The system found that I qualified for some business loss carryovers from a side business that failed two years ago, which my regular tax software hadn't prompted me about. It also identified that some of my medical expenses actually did cross the threshold for deduction when properly categorized. My conversion tax bill went from unbearable to merely painful. Still had to set up a payment plan, but for a much lower amount. The document analysis was pretty impressive - it caught things my previous accountant had missed.

If you need to talk directly with the IRS about your options, good luck getting through! I spent DAYS trying to reach someone about my Roth conversion disaster. Then I found https://claimyr.com which got me connected to an actual IRS agent in under 45 minutes. You can see how it works at https://youtu.be/_kiP6q8DX5c Once I finally talked to someone, they laid out all my payment options and even helped identify a temporary hardship delay since I was between jobs. The agent was surprisingly helpful once I actually got through to a human. Without Claimyr I'd probably still be listening to the IRS hold music!

OK I have to eat my words about Claimyr. After my doubtful comment I decided to try it anyway since I was desperate to talk to someone at the IRS about my own tax mess (not a Roth conversion, but a CP2000 notice). After literally 17 calls on my own over 3 days with no success, Claimyr got me through to an IRS representative in about 35 minutes. The person I spoke with was able to put my account on temporary hardship status while I sort things out. For the original poster - ask specifically about the IRS Fresh Start program when you get through. Since you're unemployed, you might qualify for an Offer in Compromise or Currently Not Collectible status which could significantly help with your Roth conversion tax burden.

One thing to consider is whether you qualify for penalty abatement even though you can't undo the conversion. The IRS has a First Time Penalty Abatement policy that could at least remove the failure-to-pay penalties (though not the interest). You need to have a clean compliance history for the past 3 years. This won't eliminate the tax itself but could save you thousands in penalties. Worth asking about when you speak with the IRS. Also, make sure you're accounting for any basis you had in your traditional IRAs (money you contributed after-tax). That portion of the conversion shouldn't be taxed again.

Make sure you explore all possible deductions/credits to offset some of this conversion income! Unemployment often makes people eligible for credits they wouldn't normally get. Check if you qualify for the Earned Income Credit, education credits if you took any classes, or increased medical expense deductions (threshold is lower when income drops). Also, since you were laid off, don't forget to deduct any job search expenses that might be eligible. Every little bit helps when facing a big tax bill from Roth conversions!

I'm really sorry to hear about your situation - getting hit with unemployment and a massive tax bill at the same time is incredibly stressful. Since you can't undo the conversion, here are a few additional strategies to consider: First, if you haven't already, make sure you're maximizing your 2023 deductions. Since you were unemployed for part of the year, you might qualify for larger medical expense deductions (they need to exceed 7.5% of AGI), and any charitable contributions you made could help offset some of the conversion income. Second, consider whether you have any capital losses in taxable investment accounts that you could harvest to offset some of the ordinary income from the conversion. While capital losses primarily offset capital gains, you can use up to $3,000 per year to offset ordinary income, with any excess carrying forward to future years. Finally, when you do speak with the IRS, emphasize your unemployment situation. They're often more willing to work with taxpayers facing genuine financial hardship. Document everything about your job search efforts and financial situation - this will support any hardship claims. The combination of an installment plan, penalty abatement if you qualify, and maximizing all possible deductions should help make this more manageable. Hang in there!