Letter Ruling Advice

[mrbill]

In December, 2010, client requested a $5,000 distribution from his IRA and specically requested that this distribution be processed in January, 2011. The voice tape held by the bank verifies this. The Bank used national Financial Services and they processed the reequest on December 31, 2010, ergo a 2010 transaction. This addition in 2010 taxable income, along with an increase in taxable social security, increased federal taxes by $1,100. Per discussions with the bank, the only remedy was to obtain a private letter ruling, which was requested in May, 2011. Note that 60 days had passed between the issuance and "discovery" of the 12/31/2010 date. The IRS has now responded with a 3 page letter (not a form letter), with reference to IRS codes and askinig for a $500 user fee before they will issue a letter ruling.
1st thought was not to pursue, for if not successful a loss of $500.
Now with a 3 page reply, the thought is that they would approve.
Any thoughts / advice would be appreciated. Thanks,

[veritas]

My first thought is

bank/National Financial Services pays $500 fee or additional tax. Their choice.

[Snaggletooth]

Cannot Change

Bill this is a 2010 transaction, wanted or unwanted. The failure to follow the request does not change the fact that it happened in 2010, and I don't believe National Financial Services can change the 1099-R to state that it happened in 2011.

Your client has cause of legal action against NFSC if he can justify doing so for $1100. I think the $500 user fee is a dead-end street.

For what it's worth, I have a theory about presenting divergent possibilities. Namely, the only to make sure something DOESN'T happen is to fix it where it CAN'T happen. He opened the possibility by calling them before 2010 was over.

This may sound ridiculous, and I'm not trying to blame your client. But if a city traffic planner does not want thru traffic at a hospital, you simply build a dead-end street, where you CAN'T have thru traffic. You don't build a street that goes through and then put up signs that you hope people will observe.

[veritas]

Another thought

If the bank refuses to cooperate sue in small claims court. Hoepfully they won't show up and your client can get a court order to seize bank assets.

I would like to read about it in the paper.

[FEDUKE404]

Similar scenarios

I had a client in a somewhat similar situation related to erroneous RMD from an IRA account.

As soon as client noted unrequested funds had "arrived" a cover letter and certified check in the exact amount of the distribution was sent to the payee, returning all funds. All of this occurred in mid-December. (There was no tax withholding.)

But the company still issued an incorrect Form 1099-R and IRS eventually came looking for taxes, although the taxable amount (zero) reported on the actual tax return was correct. Right or wrong, the correction distribution was treated as a "rollover" and the gross amount of the erroneous distribution was also shown on the tax return.

After a few heated telephone calls between the client and the investment firm, the company finally issued a corrected "zero-income" Form 1099-R. (Yeah, it looked a bit weird!)

The IRS was content with the explanation and new documentation.

A reasonable person might think (IF the facts are correct here) that a similar resolution might be possible without going the route of letter rulings et al. The ringer here is that, apparently, the distribution being discussed here was not resolved. But one would hope, when all the facts are on the table, that the IRS might deal with the issue and reconcile the obvious error. It's not really a "legal" question at all, IMHO.

But OTOH, another client got messed up with some Roth/Trad IRA activity. His only resolution was to pay the taxes, and scream etc to the company who eventually reimbursed him for the extra taxes et al that he could not avoid since the activity was/remained a "done deed."

I guess the pendulum can swing both ways.

FE

[ChEAr$]

To the OP, Mr Bill.

If I had such a case, I would send an explanation with the tax return explaining why the distirbution is not reported on the return. Such an explanation would include all documentation to prove to IRS why taxpayer/client should only be reporting the income in the subsequent year.

The custodian has head screwed on backwards in recommending a $500 ruling.

Now I can't guarantee that IRS would accept the explanation, but it surely is worth a shot, don't you think?

[Snaggletooth]

Sluggo

Mr. Bill, it might interest you to know we also have a board member "Sluggo."

He has posted twice recently.

[Gretel]

One question I have is the difference in tax between 2010 and 2011.

I think I would have screamed at the bank with the evidence provided until they changed the 1099.

[ChEAr$]

Unfortunately

these days most all banks are monolithic in nature, being owned out ot state and really huge! So it's next to impossible to get one of those gargantuans to admit a mistake and remedy the situation, as OP has pointed out.

In the olden days we dealt with smaller and local banks, and it was much easier.

[veritas]

Lawsuit is the way to go

This is what I'm talking about.

http://www.commondreams.org/headline/2011/06/04-2

[mrbill]

Thanks for the advice. I will recommend that he (we) start with the bank, and go from there.

[David1980]

Thanks for the advice. I will recommend that he (we) start with the bank, and go from there.

Going after the bank? Do you want them to issue a fraudulent 1099-R claiming the distribution made in 2010 was not made in 2010, or do you want them to pay the $1,100 tax? Perhaps the taxpayer can sue for the taxes they have to pay that they would otherwise not have to pay in small claims court or something...

[David1980]

To the OP, Mr Bill.

If I had such a case, I would send an explanation with the tax return explaining why the distirbution is not reported on the return. Such an explanation would include all documentation to prove to IRS why taxpayer/client should only be reporting the income in the subsequent year.

The custodian has head screwed on backwards in recommending a $500 ruling.

Now I can't guarantee that IRS would accept the explanation, but it surely is worth a shot, don't you think?

I'd agree with this.