Lost IRA basis

[swrayman]

I am preparing my taxes for the first time this year and have found that my CPA never completed form 8606. I have too much income to directly contribute to a Roth IRA, so I contribute to a traditional IRA and convert to Roth. I have never taken a tax deduction for the traditional IRA contribution. I started doing this in the early 2010's when that backdoor option became available. I have never made any withdrawals or over-contributed, maxxing out my contribution every year. Don't I need to fix this so I won't be double taxed on my wthdrawals when I retire? If so, how do I fix this in my current year on my TT forms? I'm kinda confused by the whole issue.

[MinhT1 · Accepted solution]

If you have filed no Forms 8606 for nondeductible contributions, the IRS may accept a filing of Forms 8606 for all years to establish the correct basis in your traditional IRA.

You don't need to amend your past returns if no other details have changed.

Send the 8606 forms with a cover letter explaining that you omitted to file these forms to the IRS Center where your tax returns would normally be sent.

For 2023 and future years, follow the instructions in this TurboTax Help article to file form 8606 with your tax return.

[Stevehofwa]

Let’s say you were taking distributions, of which some was basis.  Now skip a year by accident, and you go a few years paying taxes on the full distribution.  Later on, you discover the error.  Is the basis retained for a future year?  Did you lose basis(basis reduced while you paid taxes anyway) for the years reported wrongly, or can you claim the entire basis again for the next year(pro rated appropriately)?   

[dmertz]

"Is the basis retained for a future year?"

Stevehofwa, no.  Despite not preparing Form 8606 correctly, a proportional amount of the basis was distributed when you received the distribution.  If the corresponding tax year has not yet closed for a claim of refund you can amend that year's tax return to claim a refund.  Otherwise you would just file (or at least prepare) the corresponding Form(s) 8606 to correct the basis that carried forward each year and you have lost the benefit of that basis that you originally failed to report.  Line 14 of one Form 8606 carries forward to line 2 of the next Form 8606 that is needed.  You'll also need to know the corresponding year-end balance in traditional IRAs for line 6 of each of the Forms 8606 that report distributions.

[Stevehofwa]

Unfortunately this involved an inherited ira as well.  I think I’ll file an amended 8606 for the first year of the inherited ira distribution, using what I think is the right basis, and for any successive years.  It’s not a lot of basis so not worth a huge amount of effort.  I suspect the IRS is not adding all these up, as there are mountains of faulty 8606s out there.