Typically, the Internal Revenue Service taxes the interest and other investment income you earn each year. When those investment earnings stay in an individual retirement arrangement, or IRA, however, the balance in your account can grow tax-free -- meaning the earliest you may have to claim IRA income on your return is the year you retire. If your IRA distributions are taxable, but you forgot to claim the income, you can always amend your tax return.
Taxable and Nontaxable IRAs
Whether you have to pay tax on the IRA income you withdraw during retirement depends on the type of account it is. If it's a Roth IRA, the income you receive during retirement isn't taxable because the contributions you made to the account weren't deductible. With a traditional IRA, all or some of your contributions are deductible in the years you make them, but the distributions you start taking once you retire are taxable income that needs to be reported on the “IRA distributions” line of your annual returns.
Using Form 1099-R
Before amending your tax return to claim the IRA income you forgot, you'll need to know the precise amount that's taxable. The financial institution from which you receive the IRA payments should send you Form 1099-R each year. This form reports the total amount distributed from your IRA during the year and the portion that's taxable. If you ever made contributions to the traditional IRA that weren't deductible, the difference between the “gross distribution” and “taxable amount” reported on 1099-R may be the amount you don't have to claim -- but you'll need to prepare Form 8606 with your amended return in this case.
Use Form 1040X to Amend Return
Once you know how much IRA income you forgot to claim, you can prepare a separate Form 1040X for each tax year for which you need to amend the return. The “Adjusted gross income” line of the 1040X is the appropriate line to update after recalculating the AGI on your original return to include the taxable IRA income you forgot to claim. Note that if you took deductions or credits on the original return that are affected by your AGI, you may want check if any of those items need updating as well. When you're ready to file the amended return, the IRS requires you to attach Form 1099-R and, if applicable, Form 8606.
Penalties for Not Amending
If the omission of taxable IRA income results in you paying less tax than you actually owe, the IRS can charge you monthly interest and late-payment penalties on the tax underpayment. Both interest and penalty charges start to accrue from the original April 15 tax return filing deadline, -- which is also the deadline for paying your taxes -- so the sooner you amend your return and pay the additional tax, the less you'll owe in interest and penalties.
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.