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Lane
Lane, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3632
Experience:  Providing Financial & Tax advice since 1986
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I received a settlement from losses in an IRA. I would like

Resolved Question:

I received a settlement from losses in an IRA. I would like to know how or if I report this on my tax return. I received a 1099-misc for $95,000, but the check that I received was only $54419.21 which I rolled over into another IRA. Is this taxable and/or reportable income?
Submitted: 9 months ago.
Category: Tax
Expert:  Lane replied 9 months ago.

Lane :

Hi,

Lane :

The amount rolled over certainly isnt taxable ... can you tell me about the settlement?

Customer:

The amount received was from losses within an IRA, not the full amount of the losses, but a portion.

Lane :

That really atypical... was there some sort of fraud going on? (typically the investor is responsible for investment losses, UNLESS there was fraud, theft, ponzi scheme, etc

Lane :

Can you tell me what generated the losses?

Lane :

From a legal standpoint, you should not be reponsible for taxes on dollars NOT physically distributed

Lane :

Could it be that taxes were withheld?

Lane :

sorry withholding would not be on the 1099

Customer:

I am actually asking for someone else that is trying to prepare their 2012 taxes. The letter with the check from the attorney doesn't say much only that there is a confidentiality clause with the settlement, and I was told it was from a loss in the IRA.

Customer:

He said this difference in the two amounts were due to huge attorney fees.

Lane :

Quite honestly sounds a little strange BUT, it may be that the way to recoup the taxes (not have to pay tax on the difference) is to take a deduction for the attorneys fees ... Excess on amount not rolled over would be income BUT then the deduction would take the income away again

Lane :

However, if these losses were the result of a ponzi scheme (again, typically regular investment losses are the responsibility of the investor) then it will be deductible under a casualty (theft) loss

Lane :

DO you know anything about how theses LOSSES accurred?

Lane :

sorry, (occurred)

Lane :

again, if the investments just went down ... there would typically be NO settlement for that ... there MUST have been some fraud or embezzlement going on

Customer:

I gathered that fraud might be the case from the letter, but I'm not sure. I will have to talk to my friend again. So, if it was fraud, then the difference would be reported as casualty (theft) loss? He still reports the rollover on the 1040, correct? Then report the difference as income on other income line and deduct attorney fees on Schedule A?

Lane :

Thats correct

Lane :

Hang on and Ill get you some IRS documentation

Lane :

Also, from IRS pub 529:

Lane :

Losses From Ponzi-type Investment
Schemes
These losses are deductible as theft losses of in-
come-producing property on your tax return for the year
the loss was discovered. You figure the deductible loss in
Section B of Form 4684. If you qualify to use Revenue
Procedure 2009-20 and you choose to follow the proce-
dures in Revenue Procedure 2009-20, you also must
complete Appendix A of that procedure and write “Reve-
nue Procedure 2009-20” across the top of Form 4684.
See Publication 547, Casualties, Disasters, and Thefts,
for more information.

Customer:

We will look into this information. Thank you for your help. With the IRS closed, it was getting to be a panic situation with this question! Can I print our session to refer back to?

Customer:

If I have a follow up question later, is that an additional session?

Lane :

Yes, once you aret you can also just bookmark the page here and all the links will stay active as well - for printing, just do (file-print) from your browser .. you can also copy and past into a word document

Lane :

Just come back here and it will be a continuation of the same question

Lane :

You might want to use this link

Lane :

I WOULD like o know more, so I can give you more specific information

Lane :


If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.



HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.



 

Customer:

I will try to get more information and get back with you. I can just use the link to get back in touch with you correct?

Lane :

Yes, it will just come in as a continuation of this thread

Customer:

Great, thanks!

Lane :

Youre welcome

Lane :

Let me know ...

Lane :

Lane

Lane, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3632
Experience: Providing Financial & Tax advice since 1986
Lane and 3 other Tax Specialists are ready to help you
Expert:  Lane replied 9 months ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.
Expert:  Lane replied 9 months ago.

Just letting you see what this QUESTION & ANSWER mode looks like.

Just come back here, and we can finish up the question

This will allow the question ton stay open

Lane

Expert:  Lane replied 9 months ago.

Thanks for the rating.

Come back here when you know more.

Lane
Customer: replied 9 months ago.

I apologize if this is a duplicate, I could not tell if my other message was sent. I talked with my friend and he said that the settlement was due to a lawsuit brought against his brokerage firm that suggested he invest in an LLC that turned out to be a Ponzi scheme. He sued on the grounds of bad advice (no due diligence). The money was transferred from his IRA to the LLC. He rolled over the money received from the settlement since the money was originally from his IRA. The amount lost was $140k, the settlement was $95k and he received $54419.21. So, is this a casualty loss situation or what we talked about before; rollover, other income for difference and Schedule A deduction for attorney fees?

Expert:  Lane replied 9 months ago.

This is a ponzi scheme casualty loss.

Any amounts that remain taxable, after rolling over what can physically be rolled over (actual dollars distributed) should be deducted in the following way:

From IRS:

"A taxpayer who has not yet claimed a tax deduction for the theft loss is not required to include in income a recovery from the trustee or receiver. Instead, the recovery will reduce the amount a taxpayer may eventually claim as a loss. A taxpayer who claimed a tax deduction for the theft loss, however, may be required to include the recovery in income, depending on the extent to which the theft loss deduction created a “tax benefit” for the taxpayer."

Here, this means that the amount, over and above what is rolled over (amount of 1099 less amount rolled over), is the deductible loss on schedule A as a theft loss.


Lane

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