NON DEDUCTIBLE IRA CONTRIBUTION

[FRANZ]

Is there a penalty for not filing Form 8606 from 2011 to 2016.  Is there something that I need to do? 

With regards to Part III Traditional IRA Basis Detail #12, what does it mean "Basis for 2018 and earlier years"? Is this the total contributions for the previous years?

Please advise.

Thank you.

[dascpa]

Unfortunately this happens all the time.  Either clients don't tell us or if no contribution was made last year the 8606 form doesn't carryover (the basis does if entered), or it's a new client and we have no clue.  I've had to enter a ton of catch-up numbers for this and have never encountered a penalty or even a question from the IRS.  Re your other question, yes, that is where we enter the cumulative nondeductible contributions.  Separately if there is a distribution you will have to also enter the fair market value so you will need 12/31 prior year and 12/31 current year if that happens.

[qbteachmt]

"Is this the total contributions for the previous years?"

No. It's only the Nondeductible amounts contributed for a Traditional IRA. Basis = after-tax funds contributed to the account.

[kwthetaxguy]

So, if your client converts their nondeductible IRA to a Roth and they receive a 1099-R, how do you handle? Do you allocate based on the pro-rata rule or do you enter the entire amount as taxable on the return and call it a day? I've read on other sites that some folks go back and file form 8606 for years that they did not report the nondeductible contributions; however, with 15 years of preparing this client's tax returns, this is the first year I've received ANY information on their retirement accounts. 

[sjrcpa]

From the 8606 instructions:

If you are required to file Form 8606 to
report a nondeductible contribution to a
traditional IRA for 2020, but don’t do so,
you must pay a $50 penalty, unless you
can show reasonable cause.

[kwthetaxguy]

I understand. This isn't for 2020. The client informed me that in 2020 they converted an IRA to a Roth. We have not taken a deduction for the IRA and therefore, that would suggest it was nondeductible. However, the problem there is form 8606 was never filed either. 

[dascpa]

As posted previously you will find a large percentage of people who never filed 8606's, or filed for some years and not the others, or who have filed but the cumulative basis is incorrect.  While there could be a nonfiling penalty I have never seen it charged.  I have in the past recorded the cumulative basis after forcing/dragging/fighting the client to research in the year of a conversion or distribution and have never had a problem with the IRS questioning it.  I would advise the client to have records on hand of proof of contributions/deductions/nondeductions in case the IRS does question the conversion/distribution taxable amount.

[qbteachmt]

I've had to file the Form 8606 with a corrected basis than a previous 8606.

If they made nondeductible contributions to Trad IRA and converted to Roth, you should want to compute the taxable amount of the conversion pro rata to their basis. This assumes the "not deducted" amount also was not from an employment arrangement as pre-taxed.

[kwthetaxguy]

Do we have to keep track of the basis from old employer 401ks that are converted to Roths? Or, do we simply need to report the amount that is taxable in box 2A of the 1099R? 

[qbteachmt]

"Do we have to keep track of the basis from old employer 401ks that are converted to Roths?"

Every specific matters. For instance, Employer 401(k) to Roth typically is the split of the Post-tax and Pre-tax amounts. Upon termination or retirement, post-tax amounts qualify to go to Roth and untaxed earnings and pre-tax amounts go to Trad IRA, when an employee "takes their retirement funds" with them. Keep in mind that Roth 401(k) has an RMD requirement that Roth IRA does not. Also, there are the 5-year rules considerations for Roth. So, yes, you track the Roth basis, even if it is never deductible and even if it is not being reported, because you don't know what might happen in the next year or two for that taxpayer's life.

"Or, do we simply need to report the amount that is taxable in box 2A of the 1099R?"

You enter the 1099-R as it is reported for the taxpayer, and you enter the rest of the tax prep info as you know applies. The 1099-R code might show "no exception applies" when one does apply, but the issuer isn't aware of the exception. The issuer is not tracking basis, either. The taxpayer reports what applies.

Just recently on this forum, someone has a SEPP distribution, which I have seen the 1099-R issued as code 1, which was not in error but Uninformed. The issuer isn't responsible for the establishment of the SEPP. The taxpayer is responsible.