5498 adjustment to IRA cost basis
I recently reviewed a tax return of a couple with a $60,000 gross IRA distribution which was from a qualified plan rollover. All monies were before tax. I was surprised to see that the taxable portion of the distribution had been reported as about half. When I contacted the preparer of the return he mentioned that he used form 5498 to adjust the cost basis of the distribution. I have only been aware of adjustments for accounts that have been completely closed.
If this were possible and negetive markets offered opportunities to lower the taxable portion, I can not understand how the IRS would recoup during the positive years.
Permalink Submitted by Alan Spross on Mon, 2011-11-14 19:13
The only two ways to add cost basis to an IRA is to make non deductible contributions or to roll over after tax distributions from qualified plans and report them on Form 8606. The 5498 might be used to determine the year end balance of all individual IRA accounts which is needed to calculate the taxable portion of a conversion, but only when there is Form 8606 basis for the numerator. Are you sure there is no 8606 included with the return?
This is the first I have ever heard of someone using market performance to create basis in an IRA, ie trying to use a Sch D methodology for reporting retirement account distributions. This couple will probably get an unwelcome letter from the IRS, but may not get it for a couple years. They need to find another tax preparer, and who knows what other errors have been made on their returns.