IRA rollover most likely a scam

[Bucky]

Client's investment rep who he has worked with for 10 years approaches him early 2016 about a great deal. Talks him into rolling 100K from existing IRA to this new deal. Can't do direct rollover so has client withdraw 100k and invest in new deal as a rollover. A couple months go by and client is talking with other investors who tell him they can't get answers about investment and goes to find out rep's license has been suspended (a long with son-in-law who is out of Illinois and in the business) for selling products not licensed for. Taxpayer gets 1099R for 100K code 1 for penalty etc. No 5498 on file with IRS so we don't believe was ever transferred as IRA and not sure where the money is or if he will get any or part back. SEC is involved. My question is about the 10% penalty. Is there any way to avoid it. What are the chances of IRS abating due to the circumstances? I know it doesn't fall under any of the allowed exceptions. Might be able to use total disability or death once his wife becomes aware of the entire mess!

[kathyc2]

Client's investment rep who he has worked with for 10 years approaches him early 2016 about a great deal. Talks him into rolling 100K from existing IRA to this new deal. Can't do direct rollover so has client withdraw 100k and invest in new deal as a rollover. A couple months go by and client is talking with other investors who tell him they can't get answers about investment and goes to find out rep's license has been suspended (a long with son-in-law who is out of Illinois and in the business) for selling products not licensed for. Taxpayer gets 1099R for 100K code 1 for penalty etc. No 5498 on file with IRS so we don't believe was ever transferred as IRA and not sure where the money is or if he will get any or part back. SEC is involved. My question is about the 10% penalty. Is there any way to avoid it. What are the chances of IRS abating due to the circumstances? I know it doesn't fall under any of the allowed exceptions. Might be able to use total disability or death once his wife becomes aware of the entire mess!

I would certainly at least try. So, are you saying that he never received any statements from the "new" investment and needed the absence of a 5498 to think fraud is involved?

Many someone else knows, but I'm guessing there might be an adjustment to the taxable income after the fraud is proven in court. I'm thinking there was something in the Maddoff fraud as to where TP's got a reversal of fake income. But it also seems like that was just for those investors. Might be worth your time doing some research.

[FEDUKE404]

Penalty will stand - theft of funds?

The situations that allow for the abatement of the 10% penalty are fairly straight-forward as expressed by the IRS ( https://www.irs.gov/retirement-plans...-distributions ) AND there is no dispute he withdrew the funds as shown by the Form 1099-R. That is pretty much a done deed. Pay the tax and pay the penalty.

What happened to those funds afterwards is the crucial issue. Then you are talking about potential fraud issues, lawsuits, perhaps partial recovery, etc. But that could take time as well as some serious attorney fees, even if a class action suit springs up to recover something. The time period for a "qualifying rollover" of the $100k is certainly closed by now.

I think the likely best case scenario is recovering some portion of the "invested" $100k with or without assessed punitive damages. If all of the pieces fit together properly, there may be a "casualty loss" issue to come to the rescue. When all is said and done, it appears there is a distinct probability your client is simply facing. . .a $100k theft."

FE