Reposting Please Help Handling 8606 for Prior Year Deceased’s Returns
I’m reposting because one person kindly responded(see their comment w/earlier post) but it didn’t seem to match the scenario I’m presenting in that the Admin is the sole beneficiary of the estate. Regarding Traditional IRAs If an Administrator is filing a few years of previously unfiled taxes for a decedent, and knows that the decedent did previously file 8606s but is unsure of the last 8606’s figures/basis and so is unsure of decedent’s basis in IRAs, can the Admin. opt not to file 8606 and to have the whole distribution taxed as if there were no basis without this causing issues w/IRS and or penalties? Also, the decedent had been taking required distributions for many years, and was well past the age for making contributions and filing an 8606 (if one could do so correctly) would only likely lower the distribution’s taxable amount (not the total tax–just the amount that is taxable) by about $150-$200 at most. Is there any reason in this scenario that IRS would require 8606? The Admin. is also the sole Estate beneficiary so no other beneficiaries would be upset about more of the possible inheritance being eaten up by taxes due to not filing 8606. Am I wrong in thinking their would be no breach of fiduciary responsibility in that case? Thank you.
Permalink Submitted by Alan - IRA critic on Wed, 2018-05-02 23:03
No one is going to complain, and the IRS is not going to care unless possibly the Admin. attempts to preserve this basis for their own use. For example, if the IRA is assigned to the Admin individually out of the estate, and the Admin then “rediscovers” the unused basis and applies it on Form 8606 for inherited IRA RMDs. It has been suggested that under RR 82-49 that basis not applied in a given year is forfeited and cannot be deferred to later use. For example, if an IRA owner took 10 years of RMDs without applying basis for whatever reason and then determines that they should start applying it, when they begin applying it to current or still open tax years, they must calculate the amount of basis that SHOULD HAVE been applied to closed years and that basis is lost. They could then start filing the 8606 for future distributions applying the basis that would have been left had they applied the correct amount of basis all along. That prevents someone from just using basis in the years that suits them. Likewise, it is logical that an estate administrator could not fail to use basis for the benefit of the decedent, inherit the account and then apply that full unused basis for their own benefit.
Permalink Submitted by Cheryl Van Beek on Thu, 2018-05-03 00:48
Thank you very much for responding Alan-iracritic. So I guess IRS wouldn’t issue a penalty for not filing 8606 because they can verify (via 1099 Rs & 5498s) that no contributions were made for the filing years and that tax is being paid on the entire distribution amount. Also, yes, of course your point is understood about not “rediscovering” the basis. Thank you again.