Excessive deduction not excessive contribution

Submitted by Thomas Simmons on Tue, 2018-01-30 18:32

In reviewing 38 years of 1040’s and 8606 in order to determine nondeductible TIRA cost basis I have a question on how to correct to establish the right numbers? This is a question of excessive deduction not excessive contribution.

I have found great insight from previous forum questions, but I don’t think this has been addressed.
I started to make deductible contributions in1981. In 1987 my AGI was greater than the 50K exclusions for TIRA. In 1987 I also started a SEP-IRA. In 1987 my Tax form shows a full deduction taken and no 8606. In the years 1987 through 2001 full TIRA contributions deductions were taken, no 8606s, and SEP-IRA or SIMPLE-IRA in place. Income was greater than full limitations. I would think the improperly deducted contributions would not be added to the basis in reporting on 8606s for these years. How should the excessive deductions be handled? Would it be best to make corrected 8606s back to 2002 only? What are the statue of limitation in this matter?
I have had only RMD disbursements from inherited IRAs. Do TIRA and SEP/SIMPLE IRAs need to be included in aggregation for determining tax? I am assuming the inheirited IRA is fully taxable on disbursement and doesn’t include a basis to be reported on the 8606s.



Submitted by David Mertz on Tue, 2018-01-30 20:11

  • The statute of limitations for taking a deduction to which you were not entitled is up to 6 years if the underreporting of income is deemed to be substantial.  The statute of limitations is unlimited if the underreporting is deemed to be fraudulent.  It doesn’t seem like there was any fraudulent intent here, so it seems to me that the statute of limitations for the IRS to assess additional taxes on your 1987 through 2001 tax returns has expired.
  • I see reporting a nondeductible traditional IRA contribution and obtaining a deduction for the contribution as being mutually exclusive.  You’ve obtained a potential tax benefit from deducting the contribution, so it seems to me that it would be inappropriate to take an inconsistent position by now treating these as having added to your basis in nondeductible contributions.  The interests of the Government would be prejudiced if you were allowed to obtain benefit from originally treating the contributions as deductible (and having the statute of limitations expire) and a second benefit from treating the contributions as nondeductible.
  • This probably means leaving these as deducted contributions and not including them in your basis.

Submitted by Alan - IRA critic on Tue, 2018-01-30 20:25

Any basis in inherited IRAs is never mixed with basis in owned IRAs. While each could possibly include basis, in your case there apparently no basis in either. That said, few non spouse beneficiaries think to check into the possibility that they inherited an IRA with basis. With respect to your owned non Roth IRA accounts, as DMx indicated you should not be filing retroactive 8606 forms to claim basis after your improper deduction was not detected by the IRS. That would be double dipping, so there would be no 8606 forms applicable up to the present unless you located some basis in the inherited IRA.

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