New client just came in. She was a victim of identity theft; a former caretaker emptied her accounts (and her mother's) and even worse, withdrew over $100,000 from her IRA at Vanguard. 1099-R issued and even with w/h, she will owe over $10,000. She has filed a police report and they are actively investigating the case. Is there anything that can be done? Don't know if there will be any recovery, she got none of the funds, and the perpetrator has fled to Texas. She is not yet 59 1/2, and I cannot think of anything that would exempt her from the penalty or allow the distributions to be non-taxable. Could it be a theft loss, and then anything that is recovered above and beyond the deduction be taxable in a later year? By perusing the docs, the theft from the IRA happened in 2005.
-
-
Identify Theft
Joan, I don't know, but one would think that IRS has procedures in place for identity thefts.
If it is identity theft and can be proven, then one would think that we have a reporting procedure to IRS and Calif to eliminate from the tax return and taxation.
Sandy -
Identity Theft
Certainly one approach would be to report the distribution, and also claim a theft loss. But as you have pointed out, I don't see how that would avoid taxation at the regular rate, plus the 10% penalty.
On a theft loss, you can only deduct your basis in the property that was stolen. Because the funds were in the IRA pre-tax, she had no basis. Therefore, the theft loss deduction has no value, unless you take the position that the theft occurred after the distribution took place. So in order to claim the theft loss, you have to report the distribution, which is what triggers taxation and the penalty.
It seems like reporting the distribution and then the theft is putting the cart before the horse. It really feels like either the theft and the distribution occurred simultaneously, or the theft occurred before the distrubution. The thief had to assume her identity and fool the bank before she could even request the distribution.
I'm really thinking outside the box here, but the tax code does not countenance this particular fact pattern.
I would forget about the theft loss. The property stolen from her had no basis, so there is no deduction. Taking a theft loss means asserting that she got the distribution and then it was stolen from her, and that's not what happened.
She never got the distribution.
The complete documentation of the theft, together with the paper trail of where the money really went, should be sufficient to present a reasonable argument that your client simply never requested, and never received, a distribution from her IRA.
You might as well prepare in advance for a full-blown face-to-face interview with an IRS representative over this, because there is no way to reconcile the facts with the 1099-R issued by the bank. You are basically taking the position that the issuance of the Form 1099-R is a very serious, but very obvious clerical error. She never asked the bank to distribute funds from her IRA, and she certainly never got the money. The bank needs to document this somehow, and issuing a 1099-R is not the right way to do it.
I have to wonder aloud if the bank was negligent somehow... if there is now clear and undisputed evidence that your client was not the person who requested the distrubution and that she did not receive the funds, the bank should be willing to issue a corrected Form 1099-R with a zero on it. You might have to talk to someone at the bank's legal affairs department to get them to do this. But it seems like the right thing to do.
Here's a very loose analogy, that might help:
Suppose someone steals my identity, and, using my name and SSN, opens several bank accounts, and proceeds to engage in a check-kiting scheme...
Suppose further that one or two of these bank accounts that I never actually opened just happen to be interest bearing checking accounts.
The bank's computer system is going to issue a Form 1099-B with my name and SSN.
But I never actually received the interest.
There has to be a way to address this. It is a clerical error that flows directly from fraudulent, criminal activity. Your client never received a distribution from that account.
Burton M. Koss
koss@usakoss.netBurton M. Koss
koss@usakoss.net
____________________________________
The map is not the territory...
and the instruction book is not the process.Comment
-
Theft
Joan,
What a nightmare for your client! I can't even imagine this happening to me.
I don't know, but would the IRA administrator hold most of the responsibility for releasing the funds?
The reason I ask this is that I have been involved with a similar situation with a family member that had a sizeable checking account emptied out and we contacted the bank and they came to the house, filled out a ton of paperwork. They wanted to verify that the account holder did not empty out the account themselves then try to cash in a second time. The institution will make good on the funds and then go after the thief themselves in a criminal action.
I sure wish I knew more and could give you something definite, but I hope my situation may be of some help.
I sure hate to hear stories like this. Unfortunately, it's happening more and more. Makes you sick to your stomach!
DennisComment
-
IRA basis
I would think there would be basis in the IRA of $100,000. This money came from somewhere and was put into this account. Seems to me she absolutely does have basis.
Am I wrong?
DennisComment
-
From the docs and the client's description, this person took care of the client after she had extensive surgery. The client had known this person for years and trusted her. The thief apparently rolled over two of the largest IRAs into another account, and then took the distributions. The police and the client have tapes from Vanguard with the thief's voice authorizing the transactions. The thief changed the address on the accounts to a PO box she opened, so the client didn't get the statements or the 1099s. The thief also opened joint accounts at BofA with the client and without her knowledge and somehow got access to the clients other accounts. I'm thinking she impersonated the client again and had the money in the other accounts transferred into the joint account and then took it. The client didn't check her statements (she does now!) and didn't know anything was wrong until her checks started bouncing. The thief even offered to file her tax return for her and had one made up by H&R Block, but never filed it.
This is a horror story. She's been talking to an IRS agent because they popped her for not filing, so I got a POA so I can step in.Comment
-
I think
Vanguard has a problem.Comment
-
Ira Basis
It is possible the IRA has no basis.
Way back in the 1980's a taxpayer could take a deduction for an IRA contribution. So no basis. I wonder if Joan's taxpayer has been tracking IRA basis all these years?
Joan, these events make you wonder what precautions we can take or our clients can take, so this does NOT happen! It rule is a horror story, not only dealing with taxes and the IRS and FTB, but also all of the credit information.
I can not believe that Vanguard and Bank of America did not have safeguards in place, or it was this "long time acquaintance/friend" that was very very smart and knew the "interworkings"
Keep us posted on this end result, if there ever will be one!
SandyComment
-
IRA Basis
If the funds were never subjected to federal income tax, then she has no basis in the IRA. This is a fact that is applicable to various types of IRA transactions and calculations. A Roth IRA generally has a basis equal to the amount of the contributions, as does a traditional nondeductible IRA. But a deductible IRA, or an IRA that came into being through a 401(k) rollover, has zero basis.Originally posted by DTS View Post
Basis in an IRA is tracked using Form 8606, and is very important when an IRA is inherited, because it determines the taxability of the funds for the one who inherits it.
For example, one who inherits a Roth IRA generally will not pay tax on that portion of the account that is the original contributions, because the deceased taxpayer already paid tax on it. But one who inherits a traditional IRA will generally pay tax on the entire amount, because it was income to the deceased taxpayer, but it was never taxed.
With all that being said, I will concede that perhaps this whole concept reflects a definition of basis that is applicable only when determining the taxation of IRA distributions. This definition of basis, or this concept of basis, may not be relevant or applicable in any way to the determination of basis for purposes of figuring a deductible casualty or theft loss.
Burton M. Koss
koss@usakoss.netBurton M. Koss
koss@usakoss.net
____________________________________
The map is not the territory...
and the instruction book is not the process.Comment
-
IRA Deduction
Originally posted by S T View Post
Way back in the 1980s??
I have a client who is going to take an IRA deduction on her 2007 tax return. It appears on line line 32 of Form 1040.
If you are covered by a retirement plan at work, then your IRA deduction is phased out. Many people who have a 401(k) cannot take an IRA deduction. But a lot of these folks still qualify to make a Roth IRA contribution. If their income is above the Roth threshold, then they can still make a contribution to a nondeductible traditional IRA.
Any IRA contribution that is not deductible, whether it is a Roth or a traditional nondeductible contribution, will have basis. Any traditional deductible IRA contribution has a basis of zero.
Before the introduction of the Roth IRA, many people made nondeductible traditional IRA contributions. But you don't see that much anymore, because if you qualify for a Roth, there is no reason to use a nondeductible traditional IRA.
The nondeductible traditional IRA is what has largely disappeared; the deductible IRA has not disappeared at all. It's alive and well for people with relatively low incomes, especially if they don't have a plan at work.
BMKBurton M. Koss
koss@usakoss.net
____________________________________
The map is not the territory...
and the instruction book is not the process.Comment
-
IRS Procedure/Bank Procedure
This particular problem--theft from an IRA or other retirement plan, in which the theft itself involves a premature distribution--has probably happened enough that there is some sort of established precedent or procedure for addressing it, and for recognizing that the taxpayer neither authorized nor received the distribution.
If there isn't an established procedure, there may already be some cases working their way through appeals, tax court, or even federal district court.
The theory is simple but elegant: the thief had to effectively take control of the account in order to effect the distribution. Therefore, the asset was stolen before the distribution occurred. The client didn't get the distribution; the thief got it.
Here's one more analogy that is a bit far-fetched, but certainly not impossible, and right on point:
Suppose I have old-fashioned, traditional stock certificates in my desk drawer. A criminal who has access to my desk and lots of sensitive, personal data takes the following actions:
1. steals the certificates
2. opens an online trading account in my name, using my SSN
3. mails the certificates to the online broker, with a forged stock power to put them in the account in street name
4. sells the stocks through the online platform
5. wires the proceeds out of the account, into his pocket
The broker is going to issue a Form 1099-B reflecting the sale of stock.
Does anyone really think it has to be reported on my return??
For just a moment, let's completely forget about the basis. I never actually received any of the money reflected on the 1099-B. How could any of it be taxable to me?
The stock was stolen before it was sold. How can I be taxed on the proceeds of the sale of something that was stolen from me before it was sold?
BMKBurton M. Koss
koss@usakoss.net
____________________________________
The map is not the territory...
and the instruction book is not the process.Comment
-
Taxpayer Records
Without the taxpayer's tax history (form 8606 and/or prior tax returns, bank/brokerage statments) how can it be determined whether there were deductible or non deductible contributions to an IRA, or if even in fact there were rollovers to the IRA account. One would not be able to calculate whether or not Joan's taxpayer has any basis in her "Stolen" IRA account.
How would you reconstruct or determine?
SandyComment
-
Koss, I think you have something there
Especially since it seems the thief rolled $133K into another account she set up before taking the two distributions. Which would lead to the idea of the IRA being stolen BEFORE the distribution was made. I want to see copies of the statements.
Since the thief had access to the client's home, it wouldn't be too hard to snoop to get account info. Since mom lived with her too...what's the most common password a bank or other account asks you to verify who you are? What's your mother's maiden name?
BTW, she said Amex was the easiest to deal with as far as accounts this woman set up in the client's name. They cleared the account immediately. She said Chase is trying to get her to pay half(!) and she wants nothing more to do with Bof A or Vanguard.
I find it hard to believe that people don't read their statements though...of course I have all of mine in binders, and I've already figured out my RMD since I got my year end statement yesterday...Comment
-
If Vanguard
were to restore funds due to their negligence (assumed) would it qualify as a rollover contribution?Comment
-
God, I would hope so..Comment
Comment