I just discovered that in 2015 I did not add my after tax 401K contributions when computing my basis for taxes on my Mandatory Required Distributions. How do I correct this error? Can I simply use the basis increment deltas that I already calculated on my form 8606s in 2015-2020, but change the actual basis carried forward to the value that would be the case if I started with the correct basis? This approach would mean I would still eventually recover all my basis but more slowly than I would have if I had correctly shown my basis in 2015.
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This information about how the basis came to be in your traditional IRAs changes nothing in my previous reply. When the after-tax funds from the 401(k) were rolled over to the traditional IRA, they became basis in nondeductible traditional IRA contribution. The tax code (§ 72(b)) stipulates that distributions from a traditional IRA when you have basis in nondeductible traditional IRA contributions are a proportional combination of nontaxable basis and taxable amounts. Had you reported these distributions properly in 2015 through 2017, you would not be paying taxes twice on the basis portion of each distribution. Failing to report the nontaxable portion correctly does not change the fact that the basis was distributed, it just means that you filed incorrect tax returns for 2015 through 2017 that cannot now be corrected to receive a refund because the deadlines to do so have passed. You are not permitted to apply the basis in later years because it was already actually distributed in 2015 through 2017 despite your inaccurate tax returns. It's similar to failing to claim a deduction to which you were entitled; you can't simply report that missed deduction as a deduction in some future year.
Even though you can no longer claim refunds for 2015 through 2017, you should generally file the reconstructed 2015 through 2017 Forms 8606 to establish the basis that carried into 2018 and then claim refunds for 2018 through 2020 by amending those tax returns. (The deadline to amend your 2018 tax return to claim a refund is about a month away.) This will also establish the amount of basis that remains to be included on your 2021 Form 8606 line 2.
It is not possible to recover all of your basis. As I understand it, in or before 2015 you rolled a 401(k) over to an IRA and that rollover included basis in after-tax contributions that had been made to the 401(k). A proportional amount of basis was distributed each year that you took a distribution even if you failed to report it correctly on your tax returns. Your basis is now whatever shows on line 14 of the 2020 Form 8606 after having correctly reconstructed the 2015 through 2020 Forms 8606. You can file amendments to your 2018 through 2020 tax returns to claim refunds of excess taxes paid, but 2015 though 2017 are closed tax years for which you can no longer claim a refund.
Incorrectly preparing your 2015 through 2017 tax returns does not mean that the basis that you failed to include on your tax returns for those years remained in your IRAs. You are not permitted to pick and choose the years in which you apply the basis; the law does not permit that.
Thanks for your response. I would like to make a clarification. When I rolled over my 401K into a Rollover IRA, I hadn't tracked my after tax contributions to the401K-so I didn't include them in my Form 8606 computations when I started my MRDs in 2015. This year I found the documents from my 401K employer that give me this number. Since I believe you should not be taxed on the same income twice, I would like to think there is some way I should be able to recover the after tax contribution based basis when filing my 2021 taxes even though I understand I cannot amend my 2015 and 2016 returns. Any suggestions?
This information about how the basis came to be in your traditional IRAs changes nothing in my previous reply. When the after-tax funds from the 401(k) were rolled over to the traditional IRA, they became basis in nondeductible traditional IRA contribution. The tax code (§ 72(b)) stipulates that distributions from a traditional IRA when you have basis in nondeductible traditional IRA contributions are a proportional combination of nontaxable basis and taxable amounts. Had you reported these distributions properly in 2015 through 2017, you would not be paying taxes twice on the basis portion of each distribution. Failing to report the nontaxable portion correctly does not change the fact that the basis was distributed, it just means that you filed incorrect tax returns for 2015 through 2017 that cannot now be corrected to receive a refund because the deadlines to do so have passed. You are not permitted to apply the basis in later years because it was already actually distributed in 2015 through 2017 despite your inaccurate tax returns. It's similar to failing to claim a deduction to which you were entitled; you can't simply report that missed deduction as a deduction in some future year.
Even though you can no longer claim refunds for 2015 through 2017, you should generally file the reconstructed 2015 through 2017 Forms 8606 to establish the basis that carried into 2018 and then claim refunds for 2018 through 2020 by amending those tax returns. (The deadline to amend your 2018 tax return to claim a refund is about a month away.) This will also establish the amount of basis that remains to be included on your 2021 Form 8606 line 2.
dmertz,
Thanks for your very complete answer. I wish I had known to ask the question 7 years ago. twg
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