Money Scammed from IRA

Technical topics regarding tax preparation.
#1
Posts:
835
Joined:
1-Sep-2020 2:47pm
Location:
845-NY
A client gave my number to his father, who was scammed out of money via the hijack the computer method.
They had him transfer funds to Coinbase to "keep it safe".

$80k was taken from an IRA, which has been reported as a taxable withdrawl from a retirement account.

A quick search leads me to believe this loss is non-deductible under current tax law.

Can anyone confirm?
 

#2
Posts:
1121
Joined:
12-May-2021 11:01am
Location:
Alabama
That sounds correct to me.

Prior to the tax reform, I think it would have been deductible as a personal theft loss.
 

#3

#4
NYCCPA  
Posts:
196
Joined:
23-Apr-2021 5:11pm
Location:
NY
Client lost 800k, nonqualified funds, in crypto scheme. Nondeductible unless considered part of a Ponzi Scheme?
 

#5
JR1  
Posts:
6043
Joined:
21-Apr-2014 9:31am
Location:
Western 'burbs of Chicago
Good friend, wife is AN ACCOUNTANT and gave away 425k.....and now paying taxes on most of it since it was mostly retirement. All I can do is shake my head.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#6
Posts:
5702
Joined:
21-Apr-2014 7:21am
Location:
The Land
Are you intending to report the $80k as taxable?

They had him transfer funds to Coinbase to "keep it safe". $80k was taken from an IRA


How exactly did the flow of funds go here? Direct from IRA to Coinbase/thief? Or IRA to father’s personal account and then to Coinbase/thief?
 

#7
Posts:
835
Joined:
1-Sep-2020 2:47pm
Location:
845-NY
I told him I don't want to do his tax returns.

The fact pattern, first $37k was transferred from brokerage to coinbase for "safe keeping" (they told him they had access to his computer, and they already stopped a $17k theft from happening in progress, and he needed to secure the accounts immediately, send funds for safe keeping, and don't tell anyone...)
This is a retired broker/financial advisor... he admits to being foolish etc.

So the $80k went from the IRA, to the brokerage account, then to coinbase.

I tried for a rollover then loss.
I also tried for a profit motive/business investment.

Fact pattern just isn't there to support anything that might be deductible.
 

#8
Posts:
2468
Joined:
24-Apr-2014 7:54am
Location:
Wisconsin
ReckedCPAEA wrote:I told him I don't want to do his tax returns.


That's unfortunate.

So the $80k went from the IRA, to the brokerage account, then to coinbase.


Was the timeframe of this transaction under 60 days?

I agree that the loss might not be deductible, but I get the feeling I'm thinking like Jeff. I'm not 100% convinced that I would prepare a return with the $80k as taxable here. The taxpayer initiated what he thought was a rollover to a safe retirement account. Rev Proc 2020-46 is interesting reading here. Even if I wouldn't be 100% sure that the IRS would acquiesce, there are a lot of reasonable cause arguments to be made here that the ultimate final transfer of the remaining $0 to an IRA "completes" the failed rollover.

A few years ago I had a client defrauded of a $600k IRA and there was a 1099-R issued showing it as taxable. We reported the gross but nothing as taxable, submitted some additional documentation to the return, and waited for the IRS to send a nasty audit notice. Thankfully, that notice never came.
 

#9
JR1  
Posts:
6043
Joined:
21-Apr-2014 9:31am
Location:
Western 'burbs of Chicago
I'd say you got lucky.

It's taxable.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#10
Posts:
5702
Joined:
21-Apr-2014 7:21am
Location:
The Land
Fact pattern just isn't there to support anything that might be deductible.


Is the fact pattern there to support that it’s not taxable in the first place?

Was the thief aware of the IRA account and did he target that account? Why did the funds ultimately come out of the IRA as opposed to some other place?
 

#11
Posts:
2468
Joined:
24-Apr-2014 7:54am
Location:
Wisconsin
JR1 wrote:I'd say you got lucky.

It's taxable.


I sure hope that it wasn't luck that the $600k my client didn't receive wasn't taxable!

The reason I brought my situation up is because it's an example of the tax forms not always telling the whole story. In this case, the client received $80k out of his IRA, and that's not in dispute, but the client was trying to protect the money in an ultimately foolish manner. The tax involved is high enough that it's worth exploring other angles, and given the bit of information we have I wonder if the reasonable cause exception for a failed rollover could be met as one way to exclude it from income.
 

#12
JR1  
Posts:
6043
Joined:
21-Apr-2014 9:31am
Location:
Western 'burbs of Chicago
Sorry, old school. If it didn't actually land in another retirement account, taxable distribution. No legislative leeway or case law to suggest otherwise. Seems like taxpayer is getting swindled twice, and they are....but there it is.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#13
Posts:
835
Joined:
1-Sep-2020 2:47pm
Location:
845-NY
I'm currently not accepting new clients, and only agreed to talk to the father as a favor.

I gave them a few scenerios that would likely get it past the IRS computers, but also told them that based on the facts and circumstances I was doubtful that the positions would prevail under audit scrutiny, and likely would have a 20% penalty for gross understatement of tax if their position did not succeed (and I didn't want my name on the bottom of the return).

Not so much as the offer to "send me a bill, or I appreciate you taking the time to research this for me", so I won't be missing out on this client... also kept talking over me when I was trying to stick to just the facts that would help me answer the question most time cost effective (for me as I was eating the time).
 

#14
Posts:
5702
Joined:
21-Apr-2014 7:21am
Location:
The Land
The tax involved is high enough that it's worth exploring other angles,


Exactly. And one of those angles is the argument that the funds were taken under duress, will ill-intent by a fraudster. End game here is that the taxpayer wasn’t a “payee” or “distributee.” There are cases when the bad guy (or bad spouse) took the money directly from the IRA. The wrinkle here is that the taxpayer took the money and then, thereafter, forwarded it to the fraudster. If there are no cases on this fact pattern, then it would be a gamble to go this route. But there’s a first time for everything. Note that one critical thing in the case law is “economic benefit.” This issue get scrutinized more closely when the spouse if the fraudster.

With that said, you could likely get a favorable PLR (on equitable, good conscience grounds).

But that puts us in a pinch.

Do we angle for “non-taxable in the first place” and opt not to restore the funds to the IRA? If so, and our non-taxable argument fails, we wish we had gone the PLR route. And if we go the PLR route, we gotta come up with $80k from somewhere to replenish the IRA. That’s one issue. The other issue is that if we go the PLR route and win, and replensh the IRA such that no harm no foul, we certainly wonder if we would have been successful taking the “non-taxable to begin with” route.

My opinion is that the “non-taxable to begin with” route is preferable. But a strong case needs to be built, including an understanding of all the facts and a strict timeline. I’d also like to know if the fraudster targeted the IRA in some way or not.

Also, this guy should extend his return. You do not want to take a position on this matter until such time that a plan is in place.
 


Return to Taxation



Who is online

Users browsing this forum: Google [Bot], keninmichigan, wale89 and 124 guests