IRA Basis

[Gail in Virginia]

I have a "new" client this year who has a basis in the IRA's that he and his wife are drawing from.  They are traditional IRAs that had non-deductible contributions made in the past.  I say new client advisedly because we used to do his return; the last year we did was 2000.  Since he bought a computer and decided he could do it himself, no 8606 has been filed for either he or his wife.  However, he does still have a copy of the last one that we filed showing the basis he had at that time. 

 

Can we pick up where we left off with the basis?  Would we need to amend every year between 2000 and now?  File a 3115 to change accounting method?  Tell him sorry, it has been too long you just lose the basis you had left?  This is a new one on me; any suggestions or source material would be appreciated.

[BulldogTom]

Filing the 8606 does not create basis, making a contribution and not taking a deduction for it does. Filing the 8606 only tells the IRS what you have done.  But the transaction still stands on its substance.  If you can determine the amounts of the non-deductible contributions, that is the basis. 

 

Think of it this way, if the taxpayer was selling his home and had made significant improvements to the home, would you allow him to add them to basis?  Sure you would, if you could figure out how much it was that he spent on the improvements.

 

Can you figure out and document the contributions in the intervening years?  If so, that is what you should use.  You should be able to get the brokerage to give you the amounts added every year.  They should have that record.  Then pull a transcript for the years you can from the IRS and see what he deducted.

 

Not easy, but doable.  I would not even consider a 3115.

 

Tom

Newark, CA

[jklcpa]

Weird, almost this same question appeared over on the Drake forum recently.   I had one years ago where a client was contributing to an IRA and not telling me because she was covered by a plan at her work, and the entire IRA was n/d so she thought no need to report anything.  I wrote a letter that accompanied all 8606s for the prior years that should have been submitted to document the basis. From there I properly included an 8606 with each year's return after that. IRS didn't assess the $50 penalty for not filing those back years, and client never heard a word about basis not being allowed either. 

 

I totally agree with Tom's first paragraph about basis being created and calculating the deductible and nondeductible portions of each year's contributions.

 

No to the 3115 also.

[Max W]

I have had a few of these. You have to make out an 8606 for each missing year.  There is no amendment. Hopefully, the client has broker records, or form 5498 going back to 2001. If not he can get IRS Income transcripts. The transcripts would also show any distributions to account for on 1099R

 

 The only problem here is that these transcripts are not readily available for the years prior to 2005.  The might try filing 4506-T for those years, but that could take months, and there is no guarantee that the IRS will provide them.

 

Without the necessary info, the client will be out of luck and the money saved doing it himself could cost a lot.

[SaraEA]

Basis in an IRA is not a "use it or lose it" situation.  The clients had basis in their IRAs. If they contributed more after-tax, they increased their basis. If they took distributions and treated them as 100% taxable, they did not use up any of their basis. (Unlike depreciation, which is "allowed or allowable.) Just file an 8606 for the current year.  I don't think the IRS keeps track of these forms anyway. They have no reason to because they want to tax the whole thing. It's up to your clients to keep records supporting their nondeductible contributions. I just did one of these where for a few years clients were taking distributions and filing 8606s to calculate how much was not taxable.  Then for unknown reasons for a few years there were no 8606s and the distributions were 100% taxed. I just picked up basis where they left off--after all, they still have that much in their IRAs that was already taxed.

 

Speaking of do-it-yourselfers, I have an appointment tomorrow with a new client. We aren't even taking new clients but this one was referred by a valuable client. The note says she already filed her 2014 and "screwed it up" so needs an amendment.  I can't wait.....

[Jack from Ohio]

Speaking of do-it-yourselfers, I have an appointment tomorrow with a new client. We aren't even taking new clients but this one was referred by a valuable client. The note says she already filed her 2014 and "screwed it up" so needs an amendment.  I can't wait.....

Sounds like an "income opportunity!"

[SCL]

gail...for me, it would depend on the amount of time (your billing) to reconstruct the 'non ded' ira basis verses potential client tax savings.

many years ago i told clients, if you contribute to non ded iras i will not be able to follow your basis...so don't do it.

at the time, other wage deductible options were developing...401k, etc 

 

it is possible the prep time/client tax savings trade off could favor the client...if the non ded basis is 'large' enough. 

if not, take the short cut road and claim the distribution as income and move on.

[Gail in Virginia]

Thanks, everyone, for the help.  I just could not wrap my head around this last night, and you all were wonderful to help!