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.