Form 8606 Affecting Beneficiary IRA Withdrawls - Program Error?

[Crank]

I beleive there is an error in the program but I would like to find out what others think.

Taxpayer and spouse had made "nondeductible IRA contributions" totaling $5500 each many years ago. Each year an 8606 is filed with this amount on line 2 "Total IRA basis from nondeductible IRA contributions made for years 2010 and eariler".

This year, unlike other years, the program failed to generate an 8606 for the Spouse but it did generate one for the Taxpayer.

The reason it generated an 8606 for the Taxpayer is that he had a mandatory minimun withdrawl from a beneficiary IRA of $1500. The entire $1500 was listed as taxable with a code 4 on the 1099R.

The program generated a black audit error saying that line 6 on the 8606 "Value of all Traditional, Sep & Simple IRAs as of 12-31-11 required a value. If this line is left at zero then none of the $1500 is listed as taxable. If you put a value in line 6 it then calculates a percentage of the $1500 IRA distribution that is taxable but will never reach 100% since the program is taking a proportion as nontaxable based on the $5500 prior nontaxable IRA contributions.

I believe this is incorrect and all of the $1500 should be taxable. It is not a traditional IRA it is a beneficiary IRA and should not be affected by the nondeductible IRA contributions.

The form 8606 has not changed since 99 I believe this is an error in the TRXPro (TaxWorks) program. The Taxpayer had an almost identical situation last year and it calculated it correctly and the form 8606 did not come into play.

I also beleive that it was working correctly this year and changed with a recent update.

The return has been filed and I cant file an admendment until this is corrected so I can get the entire amout as taxable. Or will the IRS pick this up and make it taxable based on the 1099R and the code 4. Also the taxpayer is disabled but not age 59.5.

Sorry this is so long but I wanted to fully explain it.

In short should a beneficiary IRA mandatory minimal withdrawl with the full amount listed as taxable and a code 4 on the 1099R be affected by prior year nondeductible IRA contributions on form 8606?

Any comments on this are greatly appreciated.

[Crank]

Todays update fixed an issue with form 1099R, code 3 carrying to a NJ state. It also changed my situation listed above but it is still not correct.

1099R with code 4 and full amount taxable, Taxpayer & Spouse each with an 8606 and $5,500 in prior nondeductible IRA contributions.

The 1099R does not appear as taxable on line 15b of the 1040 However, it is no longer incorrectly calculating a portion as nontaxable on the 8606.

BUT 1099s are still wrong .... be careful!

This program is not right and I believe it was broken with the update prior to today's update. Todays update changed things but it is still incorrrect.

Im trying to get Jeremy at TRX to discuss this but havent been in contact with him yet. The tech I spoke to yesterday knew very little about taxes and balked when I suggesting elevating this issue.

[Crank]

I didnt want to post this in the RedGear thread until I was sure it was an issue. However, I spoke to TRX who contacted RedGear who said this is a known issue and there will be an update to correct it in five days on Tuesday February 14, 2012.

[Kea]

Thanks for the head's up. I have a client that has an inherited Roth and an inherited Traditional IRA - with RMDs from each. I'll make sure to extra-verify this one when I get it (in another month or so).

[Crank]

Well the update today did change the 8606 and 1099Rs but it is still wrong ... (sigh). Im about ready to give up on this. Im not even calling TRX on this issue anymore.

[Mike D]

This post belongs in the TRX Tax Wowks Pending Issues for Ryan post as he will preview this location from time to time.

Good luck

Mike Dubin CPA

[Kea]

Another change on the Form 8606. Client converted Traditional IRA to Roth in 2010. 1/2 to be taxed on the 2011 return. It shows on the 8606 properly but no longer carries back to the 1040. It carried over yesterday. I added one small royalty to the return and they went from owing $1000 to getting a $2000 refund. Big change in the wrong direction for adding $400 to income.

Software did update today, but the only things I noticed for the update were state forms. But I didn't look at the list very closely.

I'll put this on Ryan's thread, too.