If nondeductible contributions are not reported on Form 8606 for the years for which nondeductible traditional IRA contributions were made, the IRS takes the position that these contributions do not represent investment in the contract that can be distributed tax free. Unless the IRS has recently changed their methods, to avoid taxation of basis under these circumstances would require taking the case to the Tax Court and providing sufficient evidence to the court that the individual indeed has basis in nondeductible traditional IRA contributions. The Tax Court has in several past cases of unreported nondeductible traditional IRA contributions allowed the basis to be reconstructed despite the individual not filing Forms 8606 as required by law, but why would anyone want to risk having to go to court when the whole situation can been avoided by properly filing the late Forms 8606.
