How to correct 8606 forms when found to be inaccurate

Submitted by ray perez on Thu, 2014-04-10 01:16

In digging through about 30 years of old tax returns it seems that various accountants either missed adding to 8606 cost basis tracking forms in some years when non-deductible contributions were made. After going through every return, listing every contribution and subtracting for every Traditional IRA to Roth conversion, it seems the current 8606 is not accurate.

How can and 8606 be amended or updated to show correct nondeductible contribution level?

Also, for years where returns showed Roth to Traditional Recharacterizations which were not taxable on the 1099-R, should those amounts be added to the 8606 Traditional IRA tracking basis?

thank you



Submitted by Alan - IRA critic on Thu, 2014-04-10 01:55

To accurately determine whether basis has not been reported in any given year, you need to know 1) that a TIRA contribution was made 2) the dollar amount 3) less any deduction taken 4) less any return of contribution/excess contribution. You can then file retroative 8606 forms without an amendment. Any distributions taken during this period for which basis was not claimed result in loss of the basis that should have been claimed, ie your basis must be reduced. Working from the oldest year (1987 was first year this could have occurred) forward gets finally gets you to the open tax years. If you took a distribution in the open tax years, you need to amend your return to apply the correct 8606 basis to those years. Finally, you get to 2014 and your basis is line 14 on your last filed 8606. As you can see this is a major project. To shorten it, you could opt to forget about years prior to 2004 when the contribution limit was only 2,000.



Submitted by ray perez on Thu, 2014-04-10 04:19

Yes, today a  list was made for every year showing whether a TIRA contribution was made, and the dollar amount.  No returns of excess or deductions were involved.Notes on the list identify the year when a TIRA to Roth conversion was made, and when Recharacterizations happened (twice).  All is noted on this new list, year by year.There was an 8606 files almost every year. No distributions were made, other than the one TIRA to Roth conversion many years ago. The 8606 that year shows basis being used, but the basis level was already incorrect from previous years, so after the conversion’s use of some basis the 8606 was still incorrect. 1099  for the conversion show conversion was non-taxable.All of this starts in the year 1990, when the first non-deductible contribution was made, an 8606 filed, and then in 1993 another non-deductible contribution was made, but the 8606 that year was not added to the older one from 1990. It starts fresh showing no prior non-deductible contributions. Clearly, the accountant forgot to check back for earlier 8606 forms.  Similar situations happened again over the following 20 years or so…periodic inaccurate 8606s.So, to fix the basis, do I send in “revised” 8606s for every year, since the problem compounds itself all the way along? Most years, 8606s were filed, but they’re wrong.  A few years, when no non-deductible contributions were made I do not see an 8606 having been included in those returns.  Do I file starting with 1990 “fixed” forms and also retroactive forms for the few years when no original form was filed?How do I distinguish between a revised 8606 and a new 8606 for year when none was filed?  For Recharacterization years, does that amount get added to the 8606 basis?thank you



Submitted by Alan - IRA critic on Thu, 2014-04-10 18:40

  • Starting with the oldest affected year, complete an original or corrected 8606 for that year, and for each year thereafter that requires an 8606 complete a new or corrected 8606 for that year including the conversion year. For the conversion year if more than 3 years back the corrected 8606 would show a higher amount of basis used for the conversion than you originally indicated. This amount of basis is permanently lost, so the line 14 amount of the corrected 8606 would be brought forward to line 2 of the next year’s 8606 as if you had used the correct amount of basis. If for any year there is no 8606 required, just skip that year. Show “corrected” on any 8606 for a year that had a prior 8606 filed.
  • For full recharacterizations of conversions, the basis you started with is restored back to the TIRA. If all you did in a year was a conversion and you recharacterized all of the conversion, you would just ignore the conversion and would only need an 8606 for that year if you also made a non deductible contribution for that year. You might have done other types of recharacterizations of regular contributions and if so take these into consideration if basis was changed, eg if you made a regular Roth contribution and recharacterized it as a non deductible TIRA contribution. You may also have had years where you made a contribution and deducted part of it. Of course, for that just show the non deductible portion on the 8606.


Submitted by ray perez on Fri, 2014-04-11 14:02

Thanks very much.For this year, since I only have a few days to complete the 2013 return, and unlikely to have time to revise all of the old 8606s, should I adust this year’s 8606 to what I believe the correct basis should be, and use that this year, then in the next week or two file all of the revised ones (and to what address do I mail those?)?  Or, should I use the basis as it has been inaccurately tracked all these years, then do an amended return in a few months for my 2013 return (showing a revised calculation of how much distribution is taxable to me)? Given the tight deadline I’m wondering what to do for this current return I’m trying to complete.



Submitted by Alan - IRA critic on Fri, 2014-04-11 17:36

You should just file an extension, and then you will have up to 6 months to put this all together and file your return. Mail the retroactive 8606 forms to the IRS filing center where you would file your return if you mailed it.



Submitted by ray perez on Sat, 2014-04-12 02:27

Yes, an extension may be the best plan.  I looked at irs.gov and see I can download and print out all of the old 8606 forms.  For years where I’m correcting the basis on forms that were filed in the appropriate tax years, I don’t see any checkbox or anyway to mark that this is a correction or which lines have new dollar amounts in them.  The instructions for the forms don’t talk about updating old forms except if you’re doing it along with a 1040x amended return.  What is the best way to indicate a Corrected 8606 which should replace the one the iRS already received in a prior year?



Submitted by Alan - IRA critic on Sat, 2014-04-12 02:57

Write across the top of the corrected form:  “Revised to reflect proper amount of basis recovery in closed tax year per RR 82-49”. Then you can continue to take the line 14 amount of each 8606 and enter it on line 2 of the next 8606 in the chronological order. You will have to do the calculations on the 8606 in the year you did the conversion to correct what the taxable amount should have been to get to the correct line 14 figure. Hope you still have copies of those old returns for distribution years. Note that even for years when you filed the 8606 when it should have been you will have to update lines 1,2,3 and 14.



Submitted by ray perez on Sun, 2014-04-13 04:25

More detailed review of this whole mess shows the 8606 for the conversion year (1998) with incorrect cost basis, but also shows that all (incorrect) cost basis was used up.  Accountant used Part II of the form to list amount converted, subtracted total amount of existing cost basis and the balance was the taxable amount.   It was not done in Part I using the formula based on total year-end TIRA value and a decimal small amount used as a multiplier to get a taxable amount.   I have read the 1998 instructions and they are very unclear, very poorly written.  Not clear if Part II should be filled in and only lines 1,2,3 and 12 of Part I, or if more of Part I should be filled in.  The instructions are much more clear in the past few years’ instructions, but for 1998 they are very unclear. So, on the old 8606 there’s a full subtraction of cost basis, not the Part I formula method.  Was that the way it was done back in 1998? A CPA did the return, who I presume knew the right way to use the form, so is it possible that was correct procedure in 1998?We’ve studied the 1998 form and instructions for hours, and cannot figure out what lines to fill in, and how to deal with the negative taxable amount if we subtract the converted amount from the larger basis amount, if we are supposed to do a straight subtraction which seems like what the 1998 instructions say.  It would, in theory, leave some basis left over for future use, but no indication of where to fill in that number.   If the full subtraction is not the way to do this, and we’re supposed to use the Part I formula method, then we end up with a much higher taxable amount that year than the accountant’s form ended up with as taxable. Can the IRS tax us on nearly 20 year old wrong calculations?(By the way, in your last message your reference to line 14 doesn’t match up with what the line in 1998 looked like, so we’ve had to do some guessing as to your intent) thank you 



Submitted by Alan - IRA critic on Mon, 2014-04-14 02:35

1998 was unique in that the conversion income was allowed (but not required) to be reported @ 25% for 4 years (1998-2001). Perhaps that will help make sense of the filing. Also, the line 14 year ending basis started in 2001. Before that it was also line 14 from 1989 to 1992 and line 12 from 1993 to 2000. No, the IRS cannot tax you for a revised taxable amount on years prior to 2011 because those years are closed. The purpose of revision is only to come up with the correct amount of basis you still have left going forward in the future. Does this help any? 



Submitted by ray perez on Fri, 2014-04-18 03:16

Thank you for your reply.  Yes, the CPA who handled the 1998 (and years before and after) return did take the 25% for 4 years approach, and that seems to have been properly handled on 1998-2001 returns.  We remember that was a special 1998 arrangement the IRS allowed, and the form was set up to show that.Here are specifics. This may help guide you as to what was done properly or not in 1998 (line numbers correspond to the original 1998 line numbering):line 1. Enter your non-deductible contrib for 1998         $ 2000.line 2. Enter your basid from 1997 and earlier yrs                0.  (incorrect. Should say 9,800.)line 3. Add lines 1 and 2                                                  2000.  (incorrect. Should say 11,800)Then it says: “Did you receive any distributions (withdrawals) from traditional IRAs in 1998? If NO, enter amount from line 3 on line 12 and do not complete the rest of Part 1.  If YES, go to line 4However, the instructions are not clear as to whether a Conversion is considered a distribution or not. A 1099s was issued showing a distribution (and code 2 Early Distribution Except Applies).  It is not clear whether the remaining lines in Part 1 should be filled in or not.  The CPA did not fill them in.  But, we are not sure if that was handled correctly.Assuming the rest of Part 1 should have been filled in, here is what we think should be the correct entries:line 4. Enter contrib made Jan-Apr 1999                               was left blank  (correct. No contrib made in Jan-Apr)line 5. Subract line 4 from 3                                                 was left blank   (should say 11,800line 6. Enter value of ALL traditional IRAs as of 12/31/98                  was left blank    (if this is supposed to ONLY be the value of TRADITIONAL, the line should have said $9,870. Poor investment had made the account value lower than total contributions.  We believe, however, according to the 8606 Instructions that this should included SEP-IRA total value, too, and therefore the number should be 9,879.+ 160,000.=169,870)  (CPA also knew there were existing SEP contributions made for many previous years, and on this 1998 return CPA was properly deducting for 1998 SEP contribution. But, CPA didn’t but any values on Line 6)line 7. Enter total distributions in 1998 from Trad IRA          was left blank   (Correct. Instructions say not to include conversions to Roth. So, this line should be 0 “zero”)line 8.   Add lines 6 and 7                                                   was left blank  (but I suspect it should say either 9,870 or 169,870)line 9.  Divide line 5 by line 8                                     was left blank   (I suspect it should be either 1.195 or .069)line 10.  Multiply line 7 by line 9. This is your nontaxable distrib. for 1998                    was left blank   (We think this is correct, 0 “zero”)line 11. subract line 10 from line 5. This is the basis in your Trad IRAs as of 12/98            was left blank  (We suspect it should be 11,800)line 12. Add lines 4 and 11. This is your total basis for Trad IRA for 1998 and earlier yrs        $2000.  (We think this should be 11,800 since line 4 should be 11,800)line 13. Taxable amount. Subtract line 10 from line 7. Enter here and on 1040 line 15b       was left blank. (We think should this should be $0 since both lines 10 and 7 are 0 “zero”BUT, if lines 4-11 should not have been filled in (which is what the CPA did–left them blank), and instead Part II should have been filed in (as the CPA did), then those lines should be adjusted, we believe, as noted belowline 14a Enter total amount of distrib from trad IRAs during 1998 converd to Roth      CPA put  9,123  (correct)line 14b Recharacterizations                    was left blank.  Instructions are not clear on what is a recharacterization vs. a conversion, so we don’t know what they want on this line.   But, CPA left it blank, and we suspec that is correct.line 14c  Subract 14b from 14a              CPA put 9,123    (probably correct)Line 15. Enter your basis in the amount you entered on 14c.        CPA put 8,000.    (If that was the total basis from earlier years, why wasn’t that number on line 2 of Part 1?)  We suspect that number should be the same as what Line 6 asked for (Total IRA value of $9,870 or total value of IRA + SEP of $169,870  OR do they mean that since the total values exceed the conversion amount that 9,123 is the basis in the conversion amount?)Line 16 Taxable amount of conversions. Subtract 15  from 14c.     CPA put 1,123     (since other lines have incorrect entries this entry seems wrong, too.  We suspect it should be a negative numberLine 17.  This is the 4-yr election.     CPA divided 1,123  and put $281 on this form and the following 3 years’ returns. So, what seems odd was to enter an $8,000 basis on line 15, and just subract it from the conversion amount.  Aren’t conversions subject to the formula based on total accumulated account value?  Or were the rules different in 1998?Any guidance would be appreciated.  Knowing what the CPA did correctly or incorrectly, and how to correct it.Thank you 



Submitted by Alan - IRA critic on Sun, 2014-04-20 17:47

  • Sorry for delay, have been very busy last couple of days.
  • Note that the major CPA error in omitting the SEP IRA value resulted in applying 8,000 of basis to the conversion and it should have been around $600. You cannot benefit from that error and re use that same basis later. I figure that you should have come out with about 11,200 of basis remaining had it been done correctly, but you would have to reduce that by the 7,400 windfall to about 3,800 actually carrying forward on line 12 to later years. It will be tough to explain all this rationale to the IRS and not sure it is worth it to try. How many other distribution or conversion years are there after 1998?
  • Here are the actual instructions in case you need them:  http://www.irs.gov/pub/irs-prior/i8606–1998.pdf


Submitted by ray perez on Sun, 2014-04-20 18:30

Thank you.Can you tell me if the procedure the CPA followed (forget the actual numbers for the moment) was correct or incorrect? Were lines 4-11 supposed to be filled in, or not? (We have read the instructions and it’s still not clear if the notes between lines 3 and 4 on the form should be Yes or No.  Not clear if the conversion is considered a distribution (withdrawal). There is a 1099R showing a distribution, of course.  Your answer about the omission of the SEP IRA value leads us to believe that lines 4-11 should have been used by the accountant.  Or, was it correct to not use lines 4-11 but the correct number that should have been put on line 15 should have been $169,870?We’re still not clear if lines 4-11 should have been used, or if the CPA was correct to simply subtract the (incorrect) cost basis directly off from the conversion amount (on line 15).  The ‘seems’ wrong to us, as it seems odd to merely subtract what the CPA thought was the entire cost basis right off the top of the conversion amount.  (which would have resulted in a negative number if the SEP was added to TIRA value)As to how many other years have conversions:–  in 2000 there was a Recharacterizaton from Roth to TIRA  (approx. $2100)– in 2006 there was a Recharacterization from Roth to TIRA  (approx. $3200)– there were 6 years after 1998 with additional Non-Deductible TIRA contributions, each one increasing the cost basis. All at maximum levels  (so, some at $2000, some at $5000 depending on the year)If we do the math, it seems like the carry-forward cost basis at this point should be around $26,000, yet due to the errors it is shown on 8606 (as of 2012) at about $15,000.   Due to the 2013 conversion that prompted this whole discussion and the finding of the old errors, some of that basis should be used for 2013 filing (extension was filed)Is it worth it, to recover the approx $11,000 of basis?thank you 



Submitted by Alan - IRA critic on Sun, 2014-04-20 19:05

  • 4-11 should have been completed. A conversion is a distribution so the box above line 4 answer is “Yes”. Line 6 should have included the SEP IRA value. Line 7 should NOT include the conversion even though it involves a distribution -per the instructions. Line 8 is the total of 6 and 7 plus 14c so pulls in the conversion amount for purposes of the computation of the taxable %.
  • 2000 and 2006 were regular Roth contributions recharacterized as non deductible TIRA contributions for which an 8606 should have been filed I assume.
  • Sounds like the 1998 8606 is the only major hurdle, but don’t know how to explain what assumptions you are making, but you need to have line 12 correct and showing around 3800 to which future basis will be added.


Submitted by ray perez on Sun, 2014-04-20 22:44

Thank you.Review of the recharacterizations shows CPA put them on tax return Pension and Annuity distribution (pg 1 of 1040) with no taxable amount, but not on the 8606s (which were filed showing only the non-deductible contributions made in each of those years).So, were those recharacterizations were handled properly by the CPA?  If not, those 8606 forms (which were filed) should have the recharacterizations added to the cost basis, yes?  So overall carry-forward cost basis should have been improved by each of those recharacterizaions, yes?  If that’s correct, then those two years are additional hurdles.  (they factor into my guess that current cost basis should be around $26,000 not $15,000.



Submitted by Alan - IRA critic on Mon, 2014-04-21 00:52

True, but the recharacterizations are not nearly the problem that the 1998 conversion was. It is easy to file a retroactive 8606 for non deductible contributions that were not recorded on an 8606, update the accumulated basis for each such year. It’s the distributions that cause the problem, particularly if they applied more basis than should have been applied as the 1998 8606 did. Recharacterizations are not distributions, just a change of the type of IRA the contribution went to. Note that any recharacterization must include the amount of earnings, but the 8606 only shows the amount of the actual contribution.



Submitted by ray perez on Mon, 2014-04-21 02:51

Further review shows recharacterizations from Roth to non-deductible Traditional IRA in several more years.None were been reported by the CPA on 8606, none adding to non-deductible cost basis. The disributions were reported on page 1 of 1040s (showing distribution amount but showing all amount as non-taxable).5498s each year show recharacterized amounts, but no forms seem to indicate how much is earnings vs. contribution.  The amounts of the distributions are of course not the exact amount of the prior year contribution. If a recharacterization has to be the FULL amount of the prior year contribution, then simple arithmetic will show the earnings (or loss) amount. If a recharacterization does not have to be the exact amount of a prior year contribution (just as a Conversion can be any chosen amount), then there isn’t any obvious record of how much is earnings (or loss) vs. contribution amount.I’m a bit confused by your last sentence.  did you mean that the 8606 entry for recharacterization amount should be the entire amount shown on  the 1099 (which includes earnings) but only the contribution amount which was recharacterized (without earnings) should be added to non-deductible cost basis on TIRA?  Your sentence indicates the 8606 should only show actual contribution, but shouldn’t some where on the 8606 (in Part III, I suspect) show the the recharacterization amount. (and how does that amount get added into Part I where carry-forward cost basis is noted?) 



Submitted by Alan - IRA critic on Mon, 2014-04-21 03:19

  • A recharacterization is not a distribution, just a transfer. While a recharacterization could be full or partial, it’s most likely that the entire original Roth contribution was recharacterized. For example, if your income ends up in the modified AGI phaseout range, you would be allowed a partial Roth contribution and you might only recharacterize amounts in excess of the allowed Roth contribution.  As you indicated, the 1099R will show the actual dollars transferred and could be more or less than the contribution based on whether there were gains or losses while the contribution was in the Roth. You just have to be careful to not overstate your basis as the IRS will levy a penalty for that. You also need to be sure that no part of the recharacterized contribution was deducted on Form 1040, and you can tell that by looking at a copy of the old return if you have them. If you know your original contribution was 3,000 and the 1099R shows something between 2,700 and 3,300 on it, this is a very good indication that you did a full recharacterization and not a partial.
  • In the example in prior sentence, the 8606 would show a current year contribution of 3,000 regardless of the 1099R amount. Any gains would just add to the total line 6 value of the non Roth IRAs, meaning that a conversion would end up having a higher taxable %. With losses, subsequent conversions would have a lower taxable %.


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