New client, IRA stolen

[veritas]

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.

What I find interesting is the crook wanted withholding? That strikes me as very odd.
See Vanguards paperwork for an IRA distribution.

http://www.vanguard.com/pdf/drfb.pdf

[Koss]

Rollover not needed

Your client might need to retain an attorney to accomplish this, but I really think the payer (Vanguard, in this case) needs to rescind the Form 1099-R. Perhaps the only way to do this is by issuing a corrected Form 1099-R with all zeros.

The taxpayer never received a distribution.

For purposes of tax law, the original IRA remains intact.

Since the account holder never received a distribution, the 1099-R was issued in error.

Funds are missing from the account due to fraud and other criminal activity.

If funds are restored to the account, those funds are not a rollover contribution; they are not a contribution of any type.

Vanguard can simply post the funds back into the account to offset the fraudulent transfer. That's not a contribution to a retirement plan. It's nothing more than internal bookkeeping.

I like analogies. Here another one:

I walk into my bank and make a cash withdrawal from my savings account. But the teller, who happened to be smoking crack that day on his break, pulls the money from my IRA. When I catch the error and bring it to the attention of the bank, they make the necessary accounting entries to correct the error. They credit my IRA and debit my savings account.

There was no distribution from my IRA when I made the withdrawal. And there was no contribution when the bank corrected the error.

I know there's a difference between fraudulent, criminal activity, and a genuine clerical error by a bank employee. But I don't think the outcome should be different if the bank decides to put the money back into the account.

To use a much more abstract metaphor that trial lawyers are fond of...

You can't put the genie back in the bottle.

But you shouldn't even be trying to. The genie never got out.

BMK

[Koss]

Withholding

What I find interesting is the crook wanted withholding? That strikes me as very odd.
See Vanguards paperwork for an IRA distribution.

http://www.vanguard.com/pdf/drfb.pdf

That's either a very sophisticated criminal who figured that requesting optional withholding would help potentially suspicious transactions fly under the radar, precisely because criminals are unlikely to ask for withholding... or...

It may reflect a criminal who is very UNsophisticated about taxes, who thought that the withholding would allow the victim to file her taxes without reporting the distribution, and therefore thought that this would help "cover her tracks," and keep the victim unaware for a longer period of time.

BMK

[veritas]

In a private letter ruling

Funds were restored to an IRA because of poor advice from an advisor. The IRS allowed the funds as a rollover contribution.

I really would pursue whether Vanguard was negligent in distributing these funds.

[BP.]

Looks like Vanguard will default to a 10% FIT w/h if no election is made to either change the percentage, or to request zero w/h. So the crook may not have actively requested w/h'ing, just got the default rate by ignoring the w/h elections.

I also like the theory that the crook thought w/h would somehow cover their tracks; how many people say, "I didn't think I had to report that (unemployment/IRA dist/whatever) 'cause I already paid the taxes."

[JoshinNC]

This is just one more reason why I manage

as many of my client't IRA's as possible. Every morning the first thing I do is log into my DST Vision (a common remitter for all mutual fund transactions) to review any changes to accounts. I call any client who has a contribution, distribution or other change that I/we did not initiate together. I realize the majority here are not licensed to sell securities products, but this is just one more example of why we should be.

[joanmcq]

The w/h was about 20%. I think the thief was sophisticated enough, because she offered to file the client's taxes for her, and actually had Block prepare a return. The client was like, don't I have to sign something? She was disabled at this time. I think the thief did think the theft would go unnoticed longer if the returns were file. Probably wasnt' counting on the penalty. But when the returns were prepared with large tax due balances, she never filed them. My client got copies from Block after the IRS notified her about the non-filiing.

[sea-tax]

as many of my client't IRA's as possible. Every morning the first thing I do is log into my DST Vision (a common remitter for all mutual fund transactions) to review any changes to accounts. I call any client who has a contribution, distribution or other change that I/we did not initiate together. I realize the majority here are not licensed to sell securities products, but this is just one more example of why we should be.

Josh you beat me to the punch. I do the same every day I spend a good 20-30 minutes looking at each clients account. If money goes in or out I contact the client immediately to make sure that they are aware.

But hey vanguard funds are cheap and have low expenses! Any fool can provide invesmtent advice right?

[joanmcq]

I inherited my dad's investment advisor along with his IRA, and I'll admit I was a bit peeved at paying fees, but I figured, hey they did right by dad, so if I don't like what they're doing I can pull it out and put it in a target fund or something.

But my advisor knows what my voice sounds like on the phone, and wouldn't take funds out with out an ok. Apparently it was done all over the phone, with the thief providing answers to questions about her address, and probably mother's maiden name, which as a live-in, she would know. Makes me think twice about those fees....

[joanmcq]

Back at this issue; been trying to get the police report all this time. After analyzing the accounts, what happened was the thief rolled my clients 401(k) into an IRA and then withdrew the IRA. she did this in two chunks , although she did leave about 27k; maybe she ran before she could get that. What I would like to do is report only the withholding as the taxable portion, and exempt the penalty and disclose on th 8275. Am I totally off base here?

Reviewing this I would think the other option would be reporting the total distribution but taking a theft loss, but if I can declare it as non taxable since she did not get the funds, more the better.

[veritas]

Did your client

sign the paperwork for the rollover? Who signed the paperwork to setup the IRA? Who authorized the distribuions? Who endorsed the checks?

For a loss to be claimed it must a complete loss. It seems to me there is much potential for recovery.

[Zee]

I
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.net

I'll be darned. It appears your earlier statement is most likely correct. The IRA has no basis for a tax loss. Hopefully, Vanguard & others will be held responsible for recovery. Here's an article I found that contains an example:

http://rorfgw.com/WHAT_S_HOT/Forbes_Article/forbes_article.html

These identity-related theft stories are getting worse & worse, aren't they?

[joanmcq]

This happened in 2005. There are tapes of the thief impersonating my client to roll the funds from the 401(k) to the IRA, change the address on the account and then make the withdrawals. It wasn't just the retirement funds that were ransacked; her bank accounts, her mothers bank accounts and some other funds were taken too. Vanguard has refused to take responsibility for the transactions.

[veritas]

I can't setup

an IRA without a signature. I must verify the person is legitimate as either a client I have done taxes for or proper id such as a drivers license.

What has your client done? Besides a police report which seems to have gone nowhere.

Has she tried filing a complaint with the SEC?

http://www.sec.gov/complaint/selectconduct.shtml

[joanmcq]

Thank you for the link. I will see if she has reported Vanguard; that might get her somewhere. I've also been told the IRS likes FTC reports when ID theft is involved.