Loss on IRA

[Corduroy Frog]

We are apparently allowed to deduct a loss on an IRA as a Misc Itemized Deduction subject to the 2%.

Interesting phone call from a former client, a retired PhD in Electrical Engineering, who has relocated to Ohio and now uses TurboTax. His 2008 return was audited by IRS and an adjustment proposed for a typical TT user who has bought into the idea that a lousy 44 bucks makes him a prolific tax preparer.

I agreed with IRS and want to make sure my unwelcomed news was correct.

During 2008 the value of his IRA dropped from $1,000,000 to $500,000. His minimum required distribution was $60,000. So he reads in the Pubs that if a loss is distributed, it becomes an itemized deduction to the extent of the loss. So he figures that he has a 50% loss, and in the $60,000 distribution, 50% of it was a "loss." He takes a $30,000 deduction subject to the 2%.

He has been filing 8606, and has a basis of $31,000. In the days before 1975 when there was no income deferral, he contributed from after-tax money to TIAA-CREF when he was a Professor, and has religiously calculated his tax-free basis. His taxable distribution, instead of $60,000, has been correctly calculated to account for his basis.

I agree with everything, except I believe the calculation of a "loss" has to be measured against basis rather than prior year value. In other words, the only way he could have a loss would be if the value of his IRA dropped BELOW $31,000. If it dropped to $24,000, he could have deducted $7,000 or his distribution, whichever was less. And his basis going into the next year would have been $24K instead of $31K.

Comments? Am I losing it?

[jimenright]

We are apparently allowed to deduct a loss on an IRA as a Misc Itemized Deduction subject to the 2%.

Interesting phone call from a former client, a retired PhD in Electrical Engineering, who has relocated to Ohio and now uses TurboTax. His 2008 return was audited by IRS and an adjustment proposed for a typical TT user who has bought into the idea that a lousy 44 bucks makes him a prolific tax preparer.

I agreed with IRS and want to make sure my unwelcomed news was correct.

During 2008 the value of his IRA dropped from $1,000,000 to $500,000. His minimum required distribution was $60,000. So he reads in the Pubs that if a loss is distributed, it becomes an itemized deduction to the extent of the loss. So he figures that he has a 50% loss, and in the $60,000 distribution, 50% of it was a "loss." He takes a $30,000 deduction subject to the 2%.

He has been filing 8606, and has a basis of $31,000. In the days before 1975 when there was no income deferral, he contributed from after-tax money to TIAA-CREF when he was a Professor, and has religiously calculated his tax-free basis. His taxable distribution, instead of $60,000, has been correctly calculated to account for his basis.

I agree with everything, except I believe the calculation of a "loss" has to be measured against basis rather than prior year value. In other words, the only way he could have a loss would be if the value of his IRA dropped BELOW $31,000. If it dropped to $24,000, he could have deducted $7,000 or his distribution, whichever was less. And his basis going into the next year would have been $24K instead of $31K.

Comments? Am I losing it?

The IRA must be fully liquidated before the loss can be taken. TTB pg 4-26

[Corduroy Frog]

Reading Further

...in TTB the entire IRA must be liquidated. Not only that but if there are multiple conventional IRAs they must ALL be liquidated.

Appreciate the response from Pull Y'all Up. (Redneck version).

[joanmcq]

And his loss is limited to his basis.

Typical engineer mistake. They overthink things and almost always get taxes wrong when they do.

[rgtaxservice]

loss

It's not a loss against value. It's a loss against basis of total liquidation. He can only lose what he put in. The unrealized loss doesn't count.

[rgtaxservice]

$$$

I don't feel for clients like that. The guy values the service you provide so little that he replaces it with a $44 substitute. Causes himself a world of grief and then has the nerve to call you back. I'm guessing that if he caused this mess fo TY 2008, you didn't see him from TY 2009. Here he is two years removed from your servlces and he's telling you about his problems. With any luck, the penalties and interest will outweight what you were charging him to teach him a lesson.

I have little regard for clients that don't appreciate the work that we do. Ours is a knowledge industry. We get paid for what we KNOW, not what we do.

- Rick

[Corduroy Frog]

I Must Agree

He was a client some 12 years ago, and a good one. Has not used a preparer since moving off. He also wants IRS to remove his penalty because he was misled by TurboTax. What a joke.

Out of candor and prior good relations, I felt constrained to send him a message after informing him that the responsibility was his and not TT. Further that TT guarantees only their calculations and not the taxpayer's interpretation of the law. Also that I have gone behind TurboTax returns about 50 times in the last several years, and found only one return that had been prepared correctly, the overwhelming majority of which had grossly overpaid their taxes.

TT is trying to put people like us out of business, by snowing the market into believing that a lousy $44 transforms the user into an instant tax expert. I was very definite in my opinion, and referred him to a fellow tax preparer who lives in his town.

[kpangelinan]

He was a client some 12 years ago, and a good one. Has not used a preparer since moving off. He also wants IRS to remove his penalty because he was misled by TurboTax. What a joke.

Out of candor and prior good relations, I felt constrained to send him a message after informing him that the responsibility was his and not TT. Further that TT guarantees only their calculations and not the taxpayer's interpretation of the law. Also that I have gone behind TurboTax returns about 50 times in the last several years, and found only one return that had been prepared correctly, the overwhelming majority of which had grossly overpaid their taxes.

TT is trying to put people like us out of business, by snowing the market into believing that a lousy $44 transforms the user into an instant tax expert. I was very definite in my opinion, and referred him to a fellow tax preparer who lives in his town.

While I agree with most of what you said, I think TT and other software out there include the IRS free file, has its purpose and is ok for that. For someone with just one W2, basic return, no Schedule A, no credits, etc, etc, etc, it works just fine and if you give that return to 100 preparers, you should get the same return....and I do emphasize (should). But for anything else, I agree. Before I finished college and even got my EA, I prepared my own returns and think I'd do them the same today....but they were simple.

[dtlee]

While I agree with most of what you said, I think TT and other software out there include the IRS free file, has its purpose and is ok for that. For someone with just one W2, basic return, no Schedule A, no credits, etc, etc, etc, it works just fine and if you give that return to 100 preparers, you should get the same return....and I do emphasize (should). But for anything else, I agree. Before I finished college and even got my EA, I prepared my own returns and think I'd do them the same today....but they were simple.

Unfortunately, not everyone is adept at knowing when they should not use these tools.

I have had clients in relatively simple situations cheated out of refunds this way. In one recent scenario, an elderly and somewhat infirmed widow on a relatively sparse fixed income (retiree with pension and social security) lost over $145 because her son decided to use an inexpensive option. To clean it up, I needed to get a transcript from the IRS because he did not keep a copy of whatever he filed for her.

I will agree, there are some situations which don't require much expertise, but sometimes it takes some expertise to identify these situations.

[kpangelinan]

Unfortunately, not everyone is adept at knowing when they should not use these tools.

I have had clients in relatively simple situations cheated out of refunds this way. In one recent scenario, an elderly and somewhat infirmed widow on a relatively sparse fixed income (retiree with pension and social security) lost over $145 because her son decided to use an inexpensive option. To clean it up, I needed to get a transcript from the IRS because he did not keep a copy of whatever he filed for her.

I will agree, there are some situations which don't require much expertise, but sometimes it takes some expertise to identify these situations.

Agreed.........

[DaveO]

[QUOTE=Corduroy Frog;111422] Also that I have gone behind TurboTax returns about 50 times in the last several years, and found only one return that had been prepared correctly, the overwhelming majority of which had grossly overpaid their taxes.
[QUOTE]

I agree with you on this. I have 3 new clients in the last year that self prepared using Turbo Tax and horribly mangled their returns. Each had received a notice of an error or CP2000. Each had overpaid their taxes in one case by several thousand $ over the 3 open years I could amend. The hardest part for me was preparing the return wrong and matching TT so I could prepare the amend in the software. In one case I ended up filling in a pdf 1040X.

[Lion]

Amendments

A trick I use to amend a return that's not in my system and is wrong:

Prepare the correct return as if it's the original. Then call up the 1040X and state but do NOT move your info to column A, leave it in column C. Then input the incorrect original numbers directly into the 1040X in column A. Your software should make the calculations for the differences.

[joanmcq]

I see the TT returns that grossly understate their income. And there are a lot of them! I've seen some really complicated returns done correctly, but usually they read every single 'explain this' item and actually understand what they are being told.

There are a lot of TT returns out there that aren't being audited and should be.

[Edsel]

TT overpayments not always

Overpayments by TT users are not always the case.

Like Joan, I wonder what would happen if some of them got audited. My favorite scenario is the guy who wants a $2500 refund, and he finds out he can go to TT Sch A and keep increasing his data input to contributions until he reaches his desired refund.

This scenario has nothing to do with TT or even paid preparers, and has been going on ever since contributions were deductible.

Bombshell news flash for IRS: This kind of thing is not going to get caught except by a good old-fashioned show-em-yer-receipts AUDIT. None of your matching programs, no preparer regulations, no office calls, no computerized tracking, NONE of this will catch it. Leave your computer programmers out of it, your penalty enhancement writers out of it, your congressional liason office out of it, and get off your butt, get out into the field and AUDIT these people.