Form 8606 Penalty

[lenboush]

From the Form 8606 instructions:

Penalty for Not Filing
If you are required to file Form 8606 to report a nondeductible contribution to a traditional IRA for 2010, but do not do so, you must pay a $50 penalty, unless you can show reasonable cause.

Question:

I have a couple who has been making non-deductible contributions to an IRA since 1984. They have always done their own taxes. Now they are approaching age 70.5 and are looking at the RMD issue and suddenly became aware of basis issues.

Amazingly, they have all the data for all of thos years so that i have no problem creating all of the past year 8606's.

With the potential for $50 per year penalties, however, I am a little concerned about $1300 (26 years X $50) in potential total penalties not to mention the added potential of additional interest over the same 26 years.

There is about $19,000 in the IRA.

Can anyone provide any data or further definition of "reasonable cause" exception mentioned in the 8606 instructions?

[JG EA]

I was not aware of this penalty. Is it new?, If so, would it apply to earlier years?

I had a client with a non-deductible portion of his and his wife's IRA. I entered that in the year I found out about it in basis of IRA's so I wouldn't forget about it. Then when he started withdrawing RMD the basis was calculated in.

I would as a precaution have the client's keep all their supporting docs for the non-deductible portion forever.

[Kram BergGold]

8606

I have filed many late 8606 forms and never has anyone been penalized.
Maybe you read things incorrectly. Either way you have to file the forms so they can get their basis.

[sea-tax]

Memory says that yes the penalty is in fact true. i also however have filed many late 8606 returns and have never seen the penalty assessed.

[FEDUKE404]

Pray tell

Why would anyone make non-deductible IRA contributions for 27 years???

(Of course, this assumes they did not deduct said contributions........)

Was any such activity even possible in 1984?? (Basically, when did Form 8606 first appear on the horizon?)

Depending on the circumstances, creating old Forms 8606 after the fact might be somewhat of a challenge. Could they deduct some/all/none?? DID they deduct some/all/none?? (When did the W2s start showing the "retirement" box??)

One would also like to think the bank/investment firm/whatever handling the accounts might have planted a bug in their ears when the tax rules changed....I believe in the early 80's.

I cannot realistically comment on the potential annual penalty. One would think since you did not prepare the tax returns your pocketbook would be safe. You might even be able to "wing it" by calculating the correct number for line 2 of the next Form 8606 and moving forward. A well-written statement could be attached to the 2011 return, but OTOH that might fall into the category of (among other things) pulling on Superman's cape.

Keep us posted, please!

FE

[DonPriebe]

Trivia

... Basically, when did Form 8606 first appear on the horizon? ...

1987

... When did the W2s start showing the "retirement" box?? ...

Who cares. IRA information doesn't appear on a W2. [OOPS! This was a dumb comment. See following posts]

... One would also like to think the bank/investment firm/whatever handling the accounts might have planted a bug in their ears when the tax rules changed....I believe in the early 80's. ...

The broker does not know if your contribution is deductible or not (or maybe only partially).

[Gary2]

Who cares. IRA information doesn't appear on a W2.

The Box 13 Retirement Plan on the W-2 is the first place to look before determining whether or not an IRA contribution is deductible.

[FEDUKE404]

Doing a thorough job for the client

Who cares. IRA information doesn't appear on a W2.

Well, actually, the information shown on the W2 (in box 13) is vital to knowing what levels of IRA deductions are permissible. It is the FIRST place I routinely look when traditional IRA issues are involved!!

A tax preparer should pay very careful attention to the "who cares" information on the W2 and also should enter said information properly into the tax software being used.

"It's elementary, Mr. Watson."

####################

The broker does not know if your contribution is deductible or not (or maybe only partially).

My own stock broker, and those involved with most of my clients, made a determined effort to notify their clients of the rule changes re non-deductible IRA contributions. While they likely may not "know if your contribution is deductible" those folks certainly made a good-faith effort to inform their clients of the existing rules.


FE

[Lion]

Clients

My clients who made too much to make a deductible IRA contribution prior to Roths and those who made too much to make a Roth contribution, have made non-deductible IRA contributions through the years.

[Kram BergGold]

So 24

So the most they could ahve contributed on a non dedcutible basis is 24 contributions of varying amounts.

[joanmcq]

I had an audit where we had to come up with IRA basis. All the years in question, you'll need the 1040s and the 5498s or the broker statements showing contributions. Having a list of the maximum allowable contributions each year (it varied quite a bit over the years) since the inceptions of IRAs can help as well, just to get you familiar with the ebb & flow of IRAs since 1987..

[OtisMozzetti]

California basis for IRA

I had an audit where we had to come up with IRA basis. All the years in question, you'll need the 1040s and the 5498s or the broker statements showing contributions. Having a list of the maximum allowable contributions each year (it varied quite a bit over the years) since the inceptions of IRAs can help as well, just to get you familiar with the ebb & flow of IRAs since 1987..

Not to mention, since I see Sacramento, CA, in your description, there can be a different basis for California tax purposes. The additional non-deductible contributions which have not yet been withdrawn are referred to as California basis.