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IRA Hardship Withdrawal

I have a client who is asking me to do this: 

I received a 1099-R. I need you to state on a "Federal Supplemental Information Form, "This withdrawal from my IRA was due to financial hardship. It seems one of the sources I associated with for my past business over the years is being charged with fraud in all the IT vendor relations that were being applied. As I was the invoice administrator, I have been brought in for review as well and have to pay some very high attorney fees, have had to close my business, undergo family hardships, and look for new work."

I called and confirmed that the client is expecting this withdrawal to be exempt from ALL tax due to financial hardship and not just the 10% penalty.  Has anyone experienced this, have advice for me on this?  When speaking to the client, they told me that a lawyer instructed them to do this and they have done it once before.  This is the 1st return I've done for this client.

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3 Comments 3
Level 15

First, point out IRA is Personal. It has nothing to do with any business issues.

Next, find the Hardship rules and confirm this even meets them, much less the Disaster rule that you are thinking applies. It might meet Neither.

Next, the Taxpayer confirms their qualification for withdrawals. Not a third-party. Not you.

Then, write the lawyer = Document This. Copy the taxpayer personally. Point out all the reference materials.

And never work with that taxpayer or that lawyer again.

"Level Up" is a gaming function, not a real life function.
Level 15

Unless there is Basis in the IRA, it is all taxable.

"Financial Hardship" is not even a waiver to the penalty.

It the lawyer instructed them to do that, the client needs to ask the lawyer for an official citation (such as from the Tax Code or Regulations).

Level 15

It may be the first return you have prepared for this client, but you're probably not the first preparer he has tried to talk into doing this.  Send him down the road, or to his tax-expert lawyer.