Accuracy of past 8606 filings
Seems to me a big factor in determining whether (and how much) a person who has co-mingles deductible and non-deductible contributions is how well they can prove the basis. That said, I also read here that most people have failed miserably at this….so my question is, how does the IRS know what your actual basis is outside of one’s own accounting for it (their word). I heard my old tax guy comment “the IRS has horrible at knowing what your true basis is…they go by whatever you report.” Given how often people move, move jobs, change investment firms (due to new 401k’s at new employers) and difficulty getting previous years records from investment firms (may only go back three years), does this boil down to the IRS having to “take your word for it?”
Permalink Submitted by Alan Spross on Thu, 2010-04-01 18:31
The IRS does have the data to determine what your basis should be if you file an incorrect 8606, but there is little evidence that their programs are comprehensive enough to flag any inconsistencies automatically. If you under report the basis on the 8606, the IRS will accept that figure for your taxable amount.
But if you over report basis on the 8606 and the IRS catches it by audit or doing whatever research is needed internally, a penalty can be levied if accidental or tax fraud charges could be brought if the IRS felt it was intentional. I am not aware of any statute of limitations that applies to this, being that the IRS has been accepting retroactive 8606 forms for years and these can go back as far as 1987.
The IRS needs only to compare the custodian provided 5498 form showing your contribution amount each year with your tax return for that year to see if that contribution was deducted. If not, and the contribution is not an excess contribution, then valid basis results for that year. I doubt that their computer matching can handle this efficiently, or there would be many many more inquiries because people do mess this up all the time. Although IRS computers may not provide this capability, that does not mean that they could not dredge up the information manually if they saw fit.
I have not heard of IRS inquiries asking the taxpayer to document the accuracy of the 8606 they filed, probably because extremely few taxpayers have that documentation or were ever advised to retain it for what is now 23 years since non deductible contributions could be made.