Can 8606 be prepared differently and be acceptable to the IRS?

Home Fairmark Forum Retirement Savings and Benefits Can 8606 be prepared differently and be acceptable to the IRS?

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  • #5227
    Sasha
    Participant

    This question might relate to the questions I ask earlier on this https://fairmark.com/forum/topic/received-1099-rs-one-of-them-with-code-g/ but I doubt it.
    I’d like to give background first in case you might understand why the tax program chose a different method to prepare our 8606 forms.

    – I’ve always done our family’s taxes by hand by submitting FREE Fillable Forms and we always file as MFJ;
    – To file 2019 taxes I hope to use FreeTaxUSA website but its method of completing our 8606 forms made me to come here to double check its correctness (I might post this message on another forum to get more eyeballs & opinions);
    – Since one of spouses changed jobs in 2019, the 401k was rolled to the new employer’s 401k. A 1099-R with Gross Distribution and Code G was received. I recorded this 1099-R on FreeTaxUSA and it didn’t affect anything on taxes which is correct IMO;
    – 2019 is the first year we got bumped into a higher tax bracket. We’ll need to pay addn’l Medicare tax and some NIIT but I don’t think it applies as how to prepare forms 8606. Both spouses have workplace 401k’s;
    – We’ve done Backdoor Roth IRA for the last few years. We’d add nondeductible contributions to our Trad.IRA’s and then convert to Roth IRA in the same year. E.g. one of 1099-R’s shows $6,004 in boxes 1 and 2a, both boxes are checked in Box 2b, and coded “2” in Box 7.
    – We always kept Trad.IRA basis at $0 at the YE of each calendar year. No other traditional IRA’s for either of us.
    My questions:
    A) Can you tell me why FreeTaxUSA prepared the forms 8606 differently than I used to do it for the last few years?
    B) Could this be that I answered its question or two incorrectly? I doubt it.
    C) Could it be because it doesn’t have our 2018 tax filing and therefore makes wrong assumptions about us?
    D) It doesn’t ask if we made non-deductible contributions in 2019. It asked to enter any contributions to IRA in 2019. Essentially FreeTaxUSA gets the same bottom result but skips Lines 6-12 and uses a worksheet 1-1 from Pub 590 B instead. Why?
    E) I also don’t know why FreeTaxUSA used “IRA Deduction Worksheet – Schedule 1, Line 19” when combined income of our W-2’s clearly shows that we wouldn’t qualify for deductible contributions. Any idea?
    This is the flow on FreeTaxUSA’s prepared 8606 Form (similar to the example in Pub.590 B) and based on the above 1099-R:
    Line 1 is $6,000
    Line 3 is $6,000
    Line 5 is $6,000
    Line 13 is $6,000* (*From Worksheet 1-1 in Publication 590 B)
    Line 16 is $6,004
    Line 17 is $6,000
    Line 18 is $4* (*From Worksheet 1-1 in Publication 590 B)

    F) Do you think the above is correct and I am OK to file it with the IRS without triggering an audit?
    This is how I would have filled out 8606 by hand and that’s what I expected to see actually:
    Line 1 is $6,000
    Line 3 is $6,000
    Line 5 is $6,000
    Line 8 is $6,004
    Line 9 is $6,004
    Line 10 is 0.999334
    Line 11 is $6,000
    Line 13 is $6,000
    Line 16 is $6,004
    Line 17 is $6,000
    Line 18 is $4

    G) Is my workflow above incorrect then? Why because I doubt it?

    In all honesty, after reading Pub.590 B a little, it appears to me that FreeTaxUSA’s method is also right. That both its and my methods of preparing 8606 form are correct.
    H) Can it be true?
    My apologies for such a long post. I deleted 1099-R’s and I’ll re-enter them again. Perhaps I misunderstand the questions..? They can be confusing for sure.

    #5230
    Alan S.
    Participant

    This option is used by several tax programs, and it submits the worksheet to the IRS replacing lines 6-12 of Form 8606. No one is reporting a problem with errors as the IRS has obviously approved this format. It appears that your entries are all correct.

    You have the advantage of knowing the correct Form 8606 standard outcome and lines 16-18 are the same as expected.

    This programming approach has been around for several years, but more tax software vendors seem to be incorporating it. Essentially, it uses the worksheet for all TIRA distributions with basis but it is really only necessary in certain situations. For a back door Roth where your contribution will be 100% non deductible it has no effect, which is why your 8606 came out the same as the worksheet version.

    #5236
    Sasha
    Participant

    Thank you, Alan. I have a request for clarification after reading your response.

    You said “This option is used by several tax programs, and it submits the worksheet to the IRS replacing lines 6-12 of Form 8606.”
    Do you mean that other tax preparation programs actually submits the Worksheet 1-1 in Publication 590-B to show their calculations on Lines 6-12?

    When I reviewed the preliminary Fed filing, FreeTaxUSA doesn’t include the actual worksheet apart the asterisk and a note “*From Worksheet 1-1 in Publication 590 B” at the bottom of 8606 form. I hope that’s also acceptable to the IRS because its example of 8606 form filing in the Pub.590-B doesn’t show it either. Would you agree?
    However, FreeTaxUSA does show that worksheet in a different place so I can save it for my records.

    Thank you.

    #5238
    Alan S.
    Participant

    Good point. Upon more research I now think that programs such as TurboTax, HR Block on line, TaxAct, and others just transmit that the Worksheet was applied to the IRS via e filing rather than providing an actual worksheet. No one is reporting on forums that I frequent that the IRS is requesting the actual calculations or a completed worksheet. There are minor differences between tax programs, and always a question whether the taxpayer entered the correct data. I would carefully review the 8606 to make sure that lines 14 and 16-18 are correct if a conversion was the only distribution. If so, no need to be concerned.

    #5239
    Sasha
    Participant

    Thanks, Alan. It looks like that various tax preparation programs copycat each other, so it’s good for me in this case.

    Yes, conversion to Roth IRA was the only distribution for us so we should be good.

    Thanks for your help.

    #5466
    Carceaxy
    Participant

    Definitely a crow design that I have never seen. John Staceys book shows silver bullion crow designs from 1886 thru the 1980s and none of them match this example?

    #7208
    Lewis-H
    Participant

    If your client hasn’t filed Form 8606 for prior years, that form can be filed on a standalone basis, and even past the usual three-year limit for requesting a refund. There may be a $50 penalty for failing to file Form 8606 when it was required, but it’s possible to have that penalty waived for reasonable cause.

    #7226
    CherylCantrell
    Participant

    Thank you, Alan. I have a request for clarification after reading your response.

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