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Gerald, Esq
Gerald, Esq, Lawyer
Category: Legal
Satisfied Customers: 3991
Experience:  30 years of experience
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I am acting as the power of attorney cousin who is in

Customer Question

I am acting as the power of attorney for my cousin who is in prison for embezzlement. His employer forced him to sign over his $200,000 IRA as part of the restitution. Now the IRS is asking for the payment of taxes on this distribution. He did sign the check but the funds went directly to the company. Can he avoid the tax consequence?
JA: The Lawyer will need to help you with this. Have you consulted a lawyer yet?
Customer: No, just the IRS appeals office.
JA: Please tell me everything you can about this issue so the Lawyer can help you best. Is there anything else the Lawyer should be aware of?
Customer: He pleaded guilty to the crime. It was in excess of 2 million. All of the funds were expended in gambling and drinking. Of the 200k IRA, 35K was paid directly to the IRS, but with increase in income plus penalties they are asking for over 61K. His is currently serving a 4 year sentence and has been in prision for 1 year.
JA: OK. Got it. I'm sending you to a secure page on JustAnswer so you can place the $5 fully-refundable deposit now. While you're filling out that form, I'll tell the Lawyer about your situation and then connect you two.
Submitted: 1 year ago.
Category: Legal
Expert:  Gerald, Esq replied 1 year ago.


Thank you for using Just Answer. I want to provide you the best service I can. Please feel free to ask any follow up questions you have.

I am an attorney with 30 years of experience; I hope to provide you information that will help you in resolving your question.

I am very sorry that your cousin is in this situation. I wish I had good news for you, but the sad reality is that there is not very much relief available to him in this situation.

Unfortunately, even though the IRA distribution was used to pay restitution for the money your cousin was accused of embezzling, it is still income to your cousin. What is worse is that because the distribution was an early distribution under the IRS code he will be hit with penalties on top of the taxes due.

Based on your description he does not meet the criteria for an exception to the penalties. So he will have to pay those too. It is not going to hurt to go through the IRS appeal process and see if you can get some relief.

To do this you will assert that the distribution was a "Hardship Distribution." A hardship distribution is a withdrawal from an IRA account that is made because of an immediate and substantial financial need. The amount withdrawn must be limited to the amount necessary to satisfy that financial need.

The challenge he faces is persuading that the situation is a true hardship because they may coldly view that this is a situation of his own making. After the internal appeals process is exhausted you may seek relief from Tax Court. But honestly that is a long shot and will require the expenditure of more funds to pay for counsel. It is worth pursuing the internal appeal process however because there is no cost to that.

I am sorry if this information is not what you wanted to hear. I would not want to mislead you and have you expend time energy and resources pursuing something where there is little chance of success.

This article discusses hardship withdrawals. Note that the IRS asserts that they can not waive the 10 % penalty, but the hearing officer may (but truthfully the odds are not good for your cousin).

I hope the information I provide is useful to you. I want you to be comfortable and satisfied with my attempt to assist you. Please, if you have ANY follow up questions, feel free to ask. Please note that I am generally unavailable Friday evening through Sunday.

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Good luck.

Please note: Information is educational and not given as legal advice. Only your local attorney can give legal advice. I can't establish or accept an attorney-client relationship with you. All posts are available for public viewing.