Determine TOTAL BASIS in Traditional IRA for TT IRA information Worksheet (2 IRA accounts)

[hamilton30]

How much would the TOTAL BASIS in two Traditional IRAs below be?

Traditional IRA-1

Started with 7 ($2K each/ yr) Non-Deductible Contributions years 1994-2000—but only 2 of them (totaling $4000) were reported on Forms 8606 by tax preparer-accountants for the respective tax year and carried forward.

Traditional IRA-2

Initially funded from liquidation of a Qualified IRA-type Annuity of $120K

$60K was converted from IRA-2 to a Roth-IRA, where the $4K (Total basis in IRAs) was applied to determine the taxable amount of $56K for the conversion on Form 8606.

The other $60K remained in the Traditional IRA-2

There has been no other conversions, distributions, contributions, or withdrawals to either of these 2 Traditional IRAs since.

How much would the Total BASIS in Traditional IRAs remain to carry forward?

Was the $4K of BASIS documented on Forms 8606 depleted in the 2010 Roth Conversion?

What could be done regarding the $10K of lost BASIS in IRA-1?

Thanks

[dmertz]

Your basis applies to the two traditional IRAs in aggregate.  However, the first problem you have is that many of the nondeductible traditional IRA contributions were not properly reported on Forms 8606 for the years for which the contributions were made.  Generally speaking, the IRS does not recognize basis that was not been properly reported on Forms 8606.

Yes, part of your Roth conversion was a nontaxable distribution of basis in nondeductible traditional IRA contributions.  However, the reporting on your 2010 Form 8606 was incorrect because an incorrect amount was reported on line 6.  Using a $14,000 as the value of IRA 1 at the end of 2010 (it was probably larger unless these funds were at some point moved to IRS 2, but I'll use $14,000 for the example calculation) and treating your basis in 2010 as being only $4,000, the amount of the Roth conversion treated as nontaxable should have been $4,000 * $60,000/ $134,000 = $1,791.  However, having claimed that $4,000 of your basis applied, you are not now permitted to take an inconsistent position that only $1,791 should have applied and that you now have $2,209 of basis remaining.

How is it that the tax preparer made so many errors?

Reconstructing your basis correctly might be a lost cause.  You would have to file the five missing Forms 8606 (probably subject to a $50 penalty for each form that was failed to be filed timely unless you can show reasonable cause) to establish that you had actually made the $10,000-worth of nondeductible traditional IRA contributions.  Correcting the 2010 Form 8606 is probably not possible due to the statute of limitations, so you would have to continue to treat it as having consumed $4,000 of your basis.

[hamilton30]

After reviewing and researching this issue over the past year or so.

The 2010 form appears may have been correct (except for the $10K of Non-deductible IRA contributions for earlier years that may be lost BASIS), because only half of the amount distributed on a 2010 Form 1099-R was converted to a ROTH in December 2010.

The other half was reported as a recharacterized contribution to a new Traditional IRA in/on January 2011 Form 5498. 

A Form 8606 was filed with my 2010 Return where $4K of BASIS was depleted.

Does this help clarify this issue any?

[dmertz]

What you are wanting to do is recover $10,000 of basis that your CPA failed to report.  The complete way to do that would be to prepare and file all of the missing Forms 8606 with explanation.  The incomplete way to do it which may or may not be acceptable to the IRS would be to file just a current-year Form 8606 with explanation, assuming that it's still the case that there have been no distributions since the $60k Roth conversion.

[hamilton30]

Thanks dmertz for the reply!

There have been no distributions since 2010-2011 Roth Conversion-IRA recharacterization contribution. 

Is it possible to recover the $10K of BASIS in Traditional IRAs, if all five of the $2K NonDeductible contributions were made in 1994-1999?

(by submitting FORMS 8606 for each of those tax years with an explanation... the CPA  literally disappeared and he never advised, informed me about the importance and significance of BASIS tracking with FORM 8606)

[dmertz]

"Is it possible to recover the $10K of BASIS in Traditional IRAs, if all five of the $2K NonDeductible contributions were made in 1994-1999?"

That could be problematic given that the 2011 Form 8606 reporting the Roth conversion did not include this basis.  One could request a Private Letter Ruling to determine how the IRS would react, but the fees to do so exceed any possible tax savings.  If you have combined state and federal marginal tax rate of, say, 33% averaged over the years you will be taking distributions, reconstructing the basis would save you about $3,300 in taxes.