Form 8606 and TIRA Cost Basis
I have converted the wife’s $55K TIRA to a Roth under the new rules for 2010. Wife claims during the years prior to our marriage all contributions were non-deductible. All contributions since marriage have been non-deductible. Mutual fund statements for the account since 1986 show her non-deductible contributions total around $20K, but Form 8606 greatly understates the cost basis ($4K). She has kept no tax records earlier than 2003.
I need to correct the 8606 for the proper (higher) basis, but don’t have the 1040 copies that go back to 1986 to prove my correction to the 8606. Can the IRS give copies back that far? Can anything be done to avoid paying what will result in higher tax?
Second, if I must pay tax on the $55K (which will have $4K cost basis from the bum 8606), should I be guess-timating and paying estimated taxes now?
Would it be easier just to reconvert to the TIRA, smile and say “Sorry Darling,” and move on 🙂
Permalink Submitted by Alan Spross on Mon, 2010-09-20 03:08
She has the 8606 basis issue whether it is resolved right now with this conversion OR gradually as her TIRA is distributed through RMDs or other distributions. The IRS is still accepting retroactive 8606 forms all the way back to 1987, but all bets are off if the revisions are not correct. There is no other way to document her basis with the IRS other than revised 8606 forms.
The issue is whether you want to pursue this project, and the amount of complexity you will face in reconstructing the facts. The IRS should have all 5498 forms on file as well as the tax returns, so for each year that there is a contribution per the 5498 AND no deduction was taken on her 1040, she has basis to report for that year. Since the 8606 is cumulative, she must start with the oldest year and work forward. If she has taken distributions without applying basis in the meantime, she should ignore those and try to establish the total basis. If she has partial records for some years OR if she has a preparer who handled the returns for a large number of those years, perhaps the preparer can provide some info.
If this is not worth all the effort and/or expense, you could retain the conversion to see if it generates enough profit to warrant paying taxes on the extra 16k. If not, the recharacterization deadline is another year from now.
The estimated tax issue depends on whether she would report the conversion income in 2010 or take the default two year deferral to 2011 and 2012. Either way, if you meet one of the safe harbors to avoid underpayment penalties, you may have a tax bill, but no penalty.