Form 8606
Any suggestions regarding correcting a Form 8606 which did not properly account for non deductible IRA contributions?
The error occurred in 2007 so the statue has closed to amend the 8606 from the first year. Individual has traditional IRA, rollover IRA and SEP IRAs. My understanding is that all of the year end balances from all three of these accounts should be added together to determine the taxability of the distributions even though initially the distributions were solely taken from the rollover account which did not have any basis.
Any thoughts?
Permalink Submitted by Alan Spross on Tue, 2011-08-09 18:04
Did the 2007 8606 fail to account for prior basis from non deductible contributions, or was there just a math error from failing to add the balances for all IRA accounts?
Your understanding is correct. It does not matter which account any non deductible contributions were made to OR which account funded any distributions. They are all aggregated together for purposes of Fomr 8606 calculations.
Permalink Submitted by Shirley Klupchak on Tue, 2011-08-09 22:49
There is no record of an 8606 being filed for 2007.
Permalink Submitted by Alan Spross on Tue, 2011-08-09 23:34
If there was prior year 8606 forms and the IRAs had basis which was overlooked in a 2007 distribution resulting in taxation of 100% of that distribution, that tax money is gone.
However, the IRAs would still have the original pre 2007 basis that could be used against future distributions.
If prior year non deductible contributions were made and the 8606 was not properly filed for any of those years, the IRS has been accepting retroactive 8606 forms back that far without penalty. If that is the case, research should be done to determine which years non deductible contributions were made (or since 2002 after tax rollovers from employer plans were rolled in) and those 8606 forms should be filed starting with the oldest year. Ignore any distributions taken in any of those years which were fully taxable (such as 2007).
What this boils down to is that any basis has been saved for future use. Once an 8606 exists, every year there is a distribution from any of the IRA types (TIRA, SEP, SIMPLE) an 8606 must be filed to recover some of the distribution tax free.
Not sure if this answers your question.
Permalink Submitted by Shirley Klupchak on Wed, 2011-08-10 13:27
Yes, that does answer the question. Thanks!
What changed in 2002 regarding employer plans?
Permalink Submitted by Alan Spross on Wed, 2011-08-10 22:41
2002 was the first year that after tax contributions to an employer plan could be rolled over to an IRA. Before that, the only way an IRA would have after tax basis would be from non deductible IRA contributions made after 1986.