basis of ira for 8606

[snowshoe]

I have been asked to prepare 8606 for ty 2006-2010. The IRA broker & I were given permission/directions for the year end statements & other needed info to be provided to me. I got the yr end statements with IRA contributions (many were made in the spring). The broker & had conversation about how to read their statement (making sure I was understanding it correctly- because what I was told & what ws on the statement didn't jive- but we got it worked out). One of my questions was 'what is the basis for each year. I don't feel really comfortable not being provided with the figures- especially since we're going back several years (for client & spouse) in order to make sure all is correctly documented.

Broker says I shouldn't need it. He doesn't have it. It can be ordered- but who knows how long it'll take to research. I can't imagine that it'd be that hard. This is an IRA that was funded out of the tp pocket. It's my undestanding that the basis would be the amount contributed each year (cumulative of course & there ave been no distributions)) with nothing else. Am I over simplifying this or are there other considerations?

The only other issue is that to start the spouse IRA there was a roll over. No one knows any info about it- other than the date (I have the 1099R). I was using this as part of the basis. And of course the value is less than the basis- which makes me feel icky about it.

So, my ? is how would you handle this? Encouragement or direction is appeciated! Happy New Year.

[WhiteOleander]

Perhaps I'm not reading your post correctly, but unless the t/p made non-deductible contributions to the IRA, there is no basis. (Assuming this is a traditional IRA)

If they did make non-deductible contribitions, then I would review each year tax return and figure what part would have been non-deductible for each year and fill out the 8606 appropriately. I'm not sure the broker or IRA custodian would have any way of knowing if the contributions were regular or non-deductible.

[appelman]

I am trying to picture...

What a statement would look like when it is "jiving."

[OtisMozzetti]

The only other issue is that to start the spouse IRA there was a roll over. No one knows any info about it- other than the date (I have the 1099R). I was using this as part of the basis. And of course the value is less than the basis- which makes me feel icky about it.
...
Encouragement or direction is appeciated!
...

If this spouse rolled over assets from, for example, a 401(k), then that amount does not count as part of the basis since it most likely was never previously taxed. It might also have been rolled over from various other sources; you need to find out where it came from.

If the account is currently worth less than its market value at the time back when it was rolled over, so what, that happens all the time as some investments go up, and some go down. If all IRA's are distributed, and there is basis (non-deductible contributions) exceeding the amount distributed, then the loss can be taken on Schedule A.

Some "direction" for you is that you really do need to get more thoroughly familiar with IRA's before working with clients that have IRA's. IRS Publication #590 is a good source, or there is a tab in The Tax Book which you should "review".

EA in Calif.

[FEDUKE404]

Additional

You have a couple of issues, separate from an uninformed investment person, staring you in the face.

I'm rather curious why, in 2012, someone wants to retroactively prepare some very old 8606s?? Most software will (should) pick up on "excess"/unallowable contributions when the tax return is being prepared, albeit any prior year carryover information might be missing.

If "regular" and/or "out-of-pocket" IRA donations were being made, the burden is on you to figure out what funds went with which calendar year. Remember it is possible, with limitations, to be in a "new" year (let's say 2012) and still make IRA contributions for the "old" year (let's say 2011) along with separate contributions for the current year.

I agree the rollover issues are not relevant to the underlying Form 8606 basis issues. OTOH, if RMDs are in play, or there is/was/will be a prior basis, then the 12/31/xxxx value of all such accounts can be a factor.

Good luck! I despise clients who approach me wanting to "repair" things that are in the distant past. Quite often, you are in a situation not unlike walking through a mine field while wearing snowshoes!

FE

[joanmcq]

The broker should be able to give you the 5498's that show the contributions for each year. The broker has no idea if the IRA contributions were deducted or not, so don't even go there.

You will need to examine the tax returns for the years in question to see if the contributions were deducted. If they were, there is no basis, as White Oleander said, and no 8606's need to be filed. If the taxpayers don't have copies of the returns, you can get transcripts from the IRS.

[Gary2]

The broker should be able to give you the 5498's that show the contributions for each year. The broker has no idea if the IRA contributions were deducted or not, so don't even go there.

You will need to examine the tax returns for the years in question to see if the contributions were deducted. If they were, there is no basis, as White Oleander said, and no 8606's need to be filed. If the taxpayers don't have copies of the returns, you can get transcripts from the IRS.

I'd say to look at it the other way around. It doesn't matter whether or not the amounts were deducted. The only way to get basis (for federal purposes) is to file the 8606. So if no 8606, then no basis, even if there were traditional IRA contributions that weren't deducted. This raises a question of whether the statute of limitations for the 8606 is separate from that for the tax return, since in theory, the 8606 can be filed separately (e.g. by someone who's not required to file a return). I don't know the answer to that, nor how the IRS will handle the $50 penalty if an 8606 is filed late.

Also, many states handle IRAs differently, so it's possible to have a state basis that's different from the federal. I don't know of any states that require separate reporting for this purpose; in MA, the taxpayer is responsible for maintaining records.

[DaveinTexas]

Similar situation

I'd say to look at it the other way around. It doesn't matter whether or not the amounts were deducted. The only way to get basis (for federal purposes) is to file the 8606. So if no 8606, then no basis, even if there were traditional IRA contributions that weren't deducted. This raises a question of whether the statute of limitations for the 8606 is separate from that for the tax return, since in theory, the 8606 can be filed separately (e.g. by someone who's not required to file a return). I don't know the answer to that, nor how the IRS will handle the $50 penalty if an 8606 is filed late.

Also, many states handle IRAs differently, so it's possible to have a state basis that's different from the federal. I don't know of any states that require separate reporting for this purpose; in MA, the taxpayer is responsible for maintaining records.

We have a client in a similar situation as the OP. An associate in our office phoned the IRS and was told there was no statute of limitations to file a valid 8606 but that there would be a $50 penalty for each form filed beyond the due date.

Anyone have any success in getting these penalties abated?

[Y2KEA]

A couple years back, I late filed 4 or 5 8606's for a TP & spouse. Never heard a peep from IRS. Did not include a cover letter or any explanation. Just had them sign, date & mail. Figured if the Service wants an explanation, they will ask.

[snowshoe]

thank you

Lots of great information here. Thank you for your time! I beleive these are ALL non-deductable contributions. I should have thought to mention that initially. I will be making for **** sure that no amounts were deductable.

Client insists that he wishes these done as he plans to start drawing some of those funds and wants documentation for prior years (and it should have been done anyhow).

Lots of thngs to think about in your posts, but I greatly take to heart the need for more training (or a refresher, update, whatever). This isn't all new to me, but when issues aren't thought about, talked about- frequently, sometimes for years- I seem to lose track of the finer points & considerations- so thanks again!

[Corduroy Frog]

I would try

Notice that there is a signature for the 8606, meaning this form is designed to be filed alone if need be. i.e. does not have to be filed as part of the 1040 package. This factor invites retroactive filing, but I'm not sure that would defeat a statute of limitations if there were one.

Brokerage houses are notorious for not producing information that you need. But the information CAN be available, regardless of how much trouble the broker says will be incurred. So I would wait for the information, not let the broker put the pressure on you because he doesn't want to do his job. No information - no backfiling. Period. Your client needs to be banging on HIS door, not yours.

It is not required that the brokerage house state whether the contribution is deductible or not. That's YOUR job, not his.

Another design of the 8606 is they must be filed SUCCESSIVELY. So you must go back to the first year there is a non-deductible contribution, and file every year thitherthence.
If the first year is 2006, that means an 8606 must be filed for every year through at least 2010. And for each year, you must determine whether the contribution is deductible or not. For purposes of deductibility, I believe a contribution can be CHOSEN to be non-deductible even if it could be. So this would require inspecting the 1040 for each intervening year.

I don't know about the penalty. I would think at least 3 years could be filed retroactively without penalty. I would not offer to pay a penalty, I would wait for IRS to assess it. They might not assess one. And remember, no "notice" is required to move ahead with the basis after you file. For this purpose, no news is good news.

You probably didn't need half the above advice, but is good for discussion.

[Kram BergGold]

One Question for Snowshoe

Were you preparing the returns for 2006-10? If so, why did you not know of the IRA contributions? If not, don't assume non deductibility. Get copies of all tax returns. This person could be scamming you.

[joanmcq]

If the broker is not cooperating, you can get copies of the 5498's from the IRS. The last few years will be available on e-services, and the rest can be dug up from the archives and mailed to you. The same with the return transcripts. If you have any reason at all to suspect what the client may be telling you, you might want to pull a few transcripts and compare them with the returns the client provides you.

I had to trace basis once in an audit where a self-prepared return was horrendously screwed up in regards to basis-tracked it back to 1986. Not fun. Don't forget to charge for all your time!!!!

[Gary2]

Another design of the 8606 is they must be filed SUCCESSIVELY. So you must go back to the first year there is a non-deductible contribution, and file every year thitherthence.
If the first year is 2006, that means an 8606 must be filed for every year through at least 2010.

Are you sure about this? I don't see anything on the 8606 saying that it needs to be filed if there were no non-deductible contributions and no withdrawals or conversions involving an IRA with existing basis (ignoring the Roth 8606 section).

On the other hand, it's extremely useful to prepare one for the client's records, even if the net result is "no change from last year's basis, and no reporting requirements." That way, they don't have to dig through history to find their basis.

[Corduroy Frog]

I would do it

Gary, don't know that a year without change in basis is absolutely necessary, but I would do it. The basis for each year by definition begins with the basis from the previous year. Thus failure to file for any year "breaks the chain". The missing year may (or may not) imply that a distribution was (or was not) taken, and whereas this is not conclusive, filing the 8606 emphatically answers such a question yea or nay.

Even if the basis doesn't change, the value of all IRAs change from year-to-year, and even though this may not be relevant except in distribution years, there is a break in continuity if an 8606 is foregone.

If the software is good, it should "roll" the taxability of an IRA distribution from the 8606 without further calculations.