Correcting Erroneous Form 8606’s

Submitted by Otis Halverson on Sun, 2017-04-16 16:57

In the early 1990’s I made non-deductible contributions to my IRA of $2,000 for each of three years. At one point, I reported basis on the 8606 as $6,000, but in 1994 I erroneously brought forward the basis as $4000. Since that time, reductions in basis due to withdrawals and conversions have been based on that lower figure. So I’ve been overstating taxable income in each year I’ve taken money from the IRA. About one-third of the basis remains today.

Of course, most of the tax years are closed and cannot be amended. Is there any provision to adjust the basis upward at this time so I can begin recovering the $2000 I overlooked years ago?

Next, should I file corrected 8606’s for the closed tax years? Should I file corrected 8606’s and 1040X’s for open tax years? I plan to extend this year’s 1040 until this is all worked out.

Thank you!



Submitted by Alan - IRA critic on Sun, 2017-04-16 18:11

  • This will be alot of work due to the number of distribution years you have since 1994. Those distributions also appear to be a large portion of your non Roth IRAs. Otherwise, the basis would not be reduced by the 2/3 you indicated.  It is not possible to predict how the IRS would react to retroactive submissions of Form 8606. The IRS may well apply RR 82-49 under which basis that should have been applied to your earlier distributions is deemed forfeited except for still open years 2014-2016. That would result in the 2,000 of basis you omitted being reduced by the amount of that 2,000 that would have applied to years from 1994 to 2013.
  • You would have to correct every 8606 filed from 1994 to 2013 starting with the 2,000 added back and then re applied on each 8606 thereafter. These forms would document the amount of basis you could have applied in each year even though these years are now closed. On the last 8606 before 2014 you will have a revised line 14 to bring forward to the first still open year you could amend. You would only amend the open years in which you took a distribution. The 8606 forms pre 2014 should be bundled with a letter of explanation indicating that you are only submitting them to show the amount of basis you mis reported in 1994 that is lost due to these distributions taken in certain closed years through 2013.
  • Depending on how much your distributions including conversions were over this period, you may wind up with only a few hundred dollars of additional basis you can actually benefit from from 2014 forward. So this is alot of work for a very small benefit. Further, if you rolled over a 401k or similar plan that doubled your IRA balance during this period, your basis would thereafter be recovered at only half the rate it otherwise would have been before that rollover.
  • As a compromise, you could substantially reduce the work involved and just submit a corrected 1994 8606 increasing that basis by the 2,000 omitted, and increase the line 14 remaining basis in your last 8606 by the 2,000 that was never applied in the interim. This is much easier as you are asking to be able to add the 2,000 to your basis going forward and totally ignoring all the interim years, but less likely to be acceptable to the IRS.

Submitted by Otis Halverson on Tue, 2017-04-18 16:17

Thanks for your exhaustive answer.  I knew it would be a can of worms, and may not be worth the work involved, given the uncertainty of corrected years being accepted. I may try the approach in your last paragraph and see if it flies.  Once that is known, that will guide me on how to handle my wife’s returns, since she has the same set of facts on her IRA.  We certainly appreciate your time!

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