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Arthur Rubin
Arthur Rubin, Tax Preparer
Category: Tax
Satisfied Customers: 1263
Experience:  22 years of tax preparation experience, including individual, trust, and estate returns.
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I just received a letter from the guardian of my IRA saying

Customer Question

I just received a letter from the guardian of my IRA saying I have to take my RMD by Dec. 31, 2010. There is not one cent in this account. I was the victim of a Ponzi scheme for an 18-month investment, and originally, this money was, indeed, in an IRA. The investor absconded with everyone's money & we were all left high & dry. My guardian keeps reporting the balance of my bogus IRA to the IRS & I've been battling this for nearly 5 yrs. The IRS won't help -- they don't care... I've already tried talking to them. I do have an FBI case, but nothing is happening & there's no guarantee I'll ever see a dime. Can I claim a loss with the IRS? What should I do about my RMD to satisfying the IRS?
Gayl James XXX@XXXXXX.XXX
Submitted: 4 years ago.
Category: Tax
Expert:  RD replied 4 years ago.

RMD is calculated based on your age and account balance. If there is no amount in the IRA account that there is nothing to withdraw.

 

Regarding deducting loss as a result of being a victim, of ponzi scheme- Are these funds in a regular IRA account? If it it than you had received deduction for these contributions on your tax return and hence, your basis in this investment is zero.

Since the basis is zero there is not loss to deduct.

This does sound confusing but I can explain it in detail if you need additional info.

Customer: replied 4 years ago.

The guardian is sending form 5498 to the IRS showing an amount of $15,919.84. Another account shows $9,539.75 but they've never sent the IRS info on it. Why I don't know. Even tho you say if there's nothing in my account to withdraw, the IRS believes there is due to form 5498. The $9,540 account is called a non-qualified trust account. The $15,920 account is a traditional IRA. I don't even know what the difference is, but I do know they've stopped communicating with me regarding the $9,540 account.

 

Sorry, but I still am unsure as to what I should do when I'm 71-1/2 in July (or by 12/31/10).

Expert:  RD replied 4 years ago.

IS $9540 balance from non deductible IRA account? If not- did you make any contribution a non qualified plan?

Customer: replied 4 years ago.
There have been NO deductions to either account.
Customer: replied 4 years ago.

Excuse me.... there have been NO contributions to either account & I don't know what a non-deductible IRA is. FYI: I just received this bit of information & am wondering if there's any truth to it?

 

IRA Account Holders Taxed on Stolen IRA Assets

Investors who had IRA assets stolen by their investment advisor must claim the dollar amount of the stolen assets as taxable income, the IRS has said in a recent ruling. Further, the IRS stated that any of the defrauded investors who were under age 59 1/2 would also be required to pay the applicable 10 percent premature distribution penalty on the dollar value of the stolen assets.

The investment advisor convinced the IRA account holders to make IRA rollover investments which he subsequently embezzled. The IRS elaborated on its position by explaining that the account holders failed to take the necessary steps required to properly set up IRA rollover accounts.

This from "High Beam Research" (highbeam.com)

Expert:  Arthur Rubin replied 4 years ago.
Hmmm. I don't see any reference on the IRS web site to what highbeam.com is saying, unless the "investment advisor" failed to complete the rollover in that case. The IRS has discretion to waive the penalty if you told him it was to be placed in an IRA account, and the rollover was done properly.

Even if that were not the case, you might be subject to the 10% premature distribution penalty, but you can claim a theft loss as an itemized deduction which matches the taxable income.

As for the "recent IRS ruling", searching the web finds that "recent" was before 1999, which was before the IRS had discretion to allow the time limits to be extended in case of fraud by the IRS custodian.

In your case, if you have no other IRAs, the minimum distribution requirement is limited to the total value in your traditional IRAs (which is $0). You should also claim that the 5498 was fraudulent (if it was), and there were no actual value of the investment in the IRA at that time.
Customer: replied 4 years ago.

OK... if I'm reading all this information correctly, then my best bet is to close out the IRA (in which there's no money) & take a loss on 2009's income tax? Or do I have to wait until 2010 income tax because I'm closing it in 2010?

 

As for fraudulent, in 2005 when I first invested my $23,000 (I did this thru my insurance broker) I'm pretty sure everyone believed this was a legitimate deal. All people involved did not think the scoundrel was going to abscond with everyone's money.... except maybe the scoundrel himself. The original guardian of this deal has long been gone & by the time the current guardian took over these accounts, they had to know there was no money.... so would that account for fraudulent? Wouldn't I have to hire an attorney to prove fraudulence? (Sorry this is taking so long, but you can see how complicated it is).

 

Expert:  Arthur Rubin replied 4 years ago.
No problem about the confusion, as I'm a little confused about exactly how the investment was structured.

If you invested $23,000, how did it get into an IRA? The annual IRA contribution limit was $3,000 back then. I think I need a record of your deductible and non-deductible contributions. (An estimate will do, for the moment.)

When did you discover the problem? (The law generally goes by the time you discovered or should have discovered the problem, but that's generally a legal question.)

It's unclear to me whether your money was invested in the fraudulent scheme within an IRA, or outside the IRA. Do you have any idea whether the fraudulently investment was actually in the IRA, or whether the investment never made it into the IRA?

I think I need more details.

I'm going to be out for about an hour on some errands.
Customer: replied 4 years ago.

Let me start at the beginning: In Oct. 2005, I took out some health insurance in Salem, Oregon. The broker who sold me the health insurance gave me a brochure listing all sorts of items he dealt with... one was "alternative investments" (which is the one I got involved with) annuity's, Medicare plans, Universal Life/Term Life Insurance, 401K's, IRA's etc. I'm happy with my health insurance, but at the same time he talked me into investing (through him) with a company called Pacific Payment Xchange, LLC in Las Vegas NV. He told me he, himself, had money invested as well (which turned out to be a lie).

 

I was given two promissory notes, both dated Nov. 14, 2005. One was for $16,009.84 and the other for $9,339.75. So originally, it wasn't an IRA but an 18-month promissory note. The custodian for both "notes" was Trust Company of the Pacific in Las Vegas. The $9,339.75 note became a "non-qualified trust account" & the $16,009.84 became a "traditional IRA." I have no idea when this took place. I have several "customer reports" and here's one dated 01/01/2004 to 01/26/2007. I had an account in Reno with AXA Equitable which I closed in order to invest with this guy. Lost $600+ on that transaction. At that time they called it an IRA Rollover & right away they took out $200 as "fees." The report says it was "disbursed" and there's no cash account balance. Since then they've tried to collect $90 in fees every so often but I don't pay it.

 

The other report says the exact same thing except the dollar amount is different. This Pacific Payment Xchange went out of business & perhaps that's when Trust Company of the Pacific took it over (the guy who ran PPX & the guy who ran TCP were buddies) and it became a traditional IRA & a non-qualified trust account.

 

I have two large files of correspondence and many, many e-mails from the guy who took my money.... promising me the moon. I've hired a detective to check out the company... everything looked OK. I filed a complaint with Division of Corporate Securities in Salem, Oregon... I filed a complaint against the insurance broker (also in Salem) and they've never even taken his license away. I've filed a complaint with the Securities Division in Nevada to no avail. On January 2, 2008, TCP went under & was taken over by Provident Trust Group. I've also filed a complaint with the Attorney General's office in Nevada & they had the nerve to tell me that "no evidence exists to support prosecution of this matter." I have tried contacting a securities attorney and he won't even answer me.

 

In May 2008, someone from the State Securities office in Nevada called me asking for certain information, which I provided. Because the money was held in Nevada, it was imperative that someone actually living in Nevada file a report, which eventually happened (some guy invested who lived at South Shore in Tahoe). At this point, the FBI was brought in & I spent 3+ hours at their Portland office giving them copies of everything I had. They are not hopeful of my ever getting any money back. I have an FBI case number XXXXX I don't hold out much hope.

 

Again, should I simply close out these accounts & take a loss? (CAN I take a loss)? I've tried to make this as clear as possible, but I'm sure I've left something out. I don't have extra money to hire attorneys & I just don't know how to get it through to someone (the IRS) that there's no money in this account & I can't take any distributions.

 

Expert:  Arthur Rubin replied 4 years ago.
I have doubts that there was ever an IRA, but let's not go there.

My advice is to close the accounts, claim a theft loss of a percentage of $9,399.75 (plus interest that you were taxed on (if any), but never received) in 2008 (or the year you discovered the theft) and claim a loss of the basis of $16,009.84 (less anything recovered) on the IRA.

The percentage is probably 90% under the Madhoff rules published in 2009, but considered to be a clarification, so they apply to previous years' returns.

The theft loss is a business theft less, taken as an itemized deduction on that year's return. The IRA loss is a miscellaneous itemized deduction (subject to the 2% limit) in 2010.

I can't easily find justification in publication 590, but closing all IRAs is considered to meet the minimum distribution requirement, regardless of whether the funds are adequate to meet the dollar amount.

Unless other taxable income in 2006-2008* (for the theft loss) or 2010 (for the IRA loss), this won't help you, but it's the best method I can suggest without trying to get the IRA voided.

The reason why 2006 can be involved is that a business theft loss can create an NOL (net operating loss) which can be carried back 2 years. The election to waive carryback expired in October 2009 (for 2008).

Edited by Arthur Rubin on 2/3/2010 at 9:25 AM EST
Arthur Rubin, Tax Preparer
Category: Tax
Satisfied Customers: 1263
Experience: 22 years of tax preparation experience, including individual, trust, and estate returns.
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