Excess IRA Deposits Over 3 years old

[Sabre]

New client is to come to my office this wed. He recently discovered he was not eligible for IRA deposits of any kind but he made nondeductible contributions for 2010, 2011 and 2012. He said an 8606 was filed with the returns. In April of this year he removed all of the excess deposits. He did not remove the earnings.

Since this goes back beyond 3 years(for amending) I may tell him to currently remove the excess earnings which we will pick up as income in 2014 and make a correction for all three years on the 8606 we file with the 2014 tax return.

Anybody with better insight - comments appreciated.

[FEDUKE404]

Can 't unring that bell

New client is to come to my office this wed. He recently discovered he was not eligible for IRA deposits of any kind but he made nondeductible contributions for 2010, 2011 and 2012. He said an 8606 was filed with the returns. In April of this year he removed all of the excess deposits. He did not remove the earnings.

Since this goes back beyond 3 years(for amending) I may tell him to currently remove the excess earnings which we will pick up as income in 2014 and make a correction for all three years on the 8606 we file with the 2014 tax return.

Anybody with better insight - comments appreciated.

I don't think you can retroactively go backwards with Forms 8606 after the appropriate filing deadline(s) for removing excess contributions and/or earnings. Those doors have firmly slammed shut.

It actually sounds more likely that you will need to complete Part III of Form 5329, tracking ALL excess contributions starting with 2010, and calculating the penalty for each year to be amended. For instance, 2011 shows penalty based upon "bad" 2010 contributions plus "bad" 2011 contributions, then 2012 shows penalty based upon "bad" 2010+2011 contributions plus "bad" 2012 contributions, and so on.

If he could not make IRA contributions "of any kind" for the years involved, then he is facing a r-e-a-l problem. You might want to collect your fees upfront?

Your client also might wish to have a heart-to-heart talk with whatever tax professional prepared those Forms 8606 over the recent years.

FE

[Sabre]

Thank you-very good thought pattern

Thank you very good thought pattern

[DaveO]

Has the IRS contacted him about this issue? I would be hesitant to jump in after the fact if I hadn't prepared the returns. I picked up a new client several years ago who brought in 2 years of returns at our first meeting. I noted they had contributed the max to their IRA each year and deducted the contribution. They responded that they had done that for the last 10 years for which I congratulated them on their savings ethic. Once I started on the current year I noted a 5498 for a ROTH IRA and commented they had two IRA accounts to which they replied, "No, just the one." They declined to amend the affected years. I prepared that year and the years since without an IRA deduction and without an IRS notice. Go figure!