converting & now found TIRA basis
Hi
Can you give some advice on this example:
Someone converts a Traditional IRA to a Roth over a period of years paying the tax each year on the conversion because they think there is no basis.
– Now a basis is uncovered when preparing taxes for year 2007. The final account conversion will complete in 2008.
1) Can the Form 8606 be completed for 2007 including the uncovered basis amount in part I of the Form 8606 without going back and ammending prior returns?
2) Is it an option for the person to choose to continue claiming no basis and record the conversion as 100% taxable income? (They planned on recording theconversion as taxable income so that might be a preferable choice than ammending returns.)
thanks
Tracy
Permalink Submitted by Edward Czapor on Sun, 2008-02-03 21:52
You can file stand alone Forms 8606 for any past years that had non-deductible contributions to establish basis without amending. You then can file the 2007 return with the full basis amount. You can amend back to 2004, for any overpaid tax up to 4/15/08. If amending, you would include the Form 8606 with the return for those years.
Ed C.
Permalink Submitted by T Foote on Sun, 2008-02-03 22:16
I wanted to check if I understand correctly…and offer a few more details.
The basis actually has been reported to the IRS back in 1992 through 1996 but those tax returns were long lost, forgotten, etc.
So, when you say to establish the basis for prior years (which technically was done) and “You then can file the 2007 return with the full basis amount.”
– Does this mean we can file 2007, declaring the basis amount in Part I without anyone asking why no basis was mentioned in the last few years of Forms 8606 filed?
So we have:
1992-1996 traditional contributions with Form 8606 reporting $2000 basis each year (total basis $8,000)
1997 deductible contribution (no Form 8606)
(no action 1998-2003)
2004-2006 conversions reported with Form 8606 stating “no basis” (not using Part I of the Form 8606)
2007 conversion reporting basis of $8,000 which will result in pro rata basis…
2008 final conversion
Does that look correct and we do not have to ammend any prior returns for 2004-2006?
Thanks so much for the guidance,
Tracy
Permalink Submitted by Edward Czapor on Sun, 2008-02-03 23:09
Yes, that is correct as long as all basis has been reported on Forms 8606.
You can file 2007 and 2008 using the basis amounts to calculate tax on conversions. You may still want to amend those returns that did not use Form 8606 to calculate the correct taxable amount yo obtain refunds.
Ed C.
Permalink Submitted by Edward Czapor on Sun, 2008-02-03 23:46
I should have added that you still should use the correct basis as if those returns that did not report the correct tax (and reduce basis accordingly) were filed. You are not required to amend those returns, but why not do so. I don’t believe you have the option of ignoring the basis adjustment due to an incorrect filing.
Permalink Submitted by Alan Spross on Mon, 2008-02-04 00:41
I agree.
You could not simply opt to accumulate basis and recover it in years of your choosing, eg high marginal rate years.
Since calculation of basis is cumulative with each year of non deductible contributions and recovering a share in each year of distributions or conversions, it can become a detailed math challenge to reconstruct the proper remainining basis if you have not completed each year’s 8606. The instructions for entering basis on line 2 of the 8606 assume the figure is coming from the appropriate prior year form. If such prior year form was omitted, the figure would have to be calculated as if the correct prior year 8606 was completed.
The result in this case is that the line 2 amount for the 2007 conversion would be no different than if the prior years were amended, even if the amendments are not filed.