IRA Settlement Revised

[GTS1101]

I have a client who originally had a profit sharing plan through Bank of America for 15 years. He left B of A and rolled all the pretax amount of 20,000 into an investment IRA with Vision Fund LP. He received K-1's every year for the IRA from Vision Fund LP which I did not report because the money was within an IRA and is not taxable until distribution's are made.The company went under and he lost the whole IRA in 2007. There was a settlement in court and he received an 8,000 settlement. All the contributions into the IRA were with Pretax dollars. The court did not issue a 1099 or anything indicating monies received from the IRA. I am assuming the whole 8,000 would become taxable in 2007? If yes how would it be reported since there is no 1099? Other income on line 21? There also may be a future settlement but it is unknown whether he will get anything else at this point.

Thanks!

[Roland Slugg]

I would treat the $8,000 as an IRA distribution and report it on the T/P's return in the year he received it. If he received it fewer than 60 days ago, it is still eligible for rollover to another IRA. If more than 60 days ago, it will be taxable, and if the recipient was under age 59½ when he received the $8,000, it is also subject to the 10% early withdrawal penalty.

Having said that, even if it's been more than 60 days, you might want to advise your client to roll it over anyway, than plan to ask the IRS for an abatement of the penalty based on confusion, uncertainty, failure to understand the options, yada, yada.