Can theft of retirement distributions be deducted as casualty and theft on 4684?

[eaf1213]

My clients parents had their retirement distributions taken out weekly by their granddaughter fraudulently. It was reported to the police and their entire retirement was drained in a matter of 6 months without them knowing. The bank never notified them of suspicious activity and wouldn't do anything about it. Now the IRS has billed them over 10K for those distributions they never authorized. My client contacted the IRS and they said there's nothing they can do. They also sent a letter saying this could possibly be a casualty and theft deduction on form 4684. How would that be reported? As an investment loss? Or is there something else that can be done.

[sjrcpa]

It is a personal casualty or theft loss but these are not currently tax deductible.

Did they prosecute the **bleep** (female dog)?

[sjrcpa]

If this was their life savings and they do not have the ability to pay the tax, they may be eligible for an Offer in Compromise to reduce the amount owed.

[IRonMaN]

I'm just curious - how did the granddaughter manage to pull the money out?

[BobKamman]

What year did this happen?  What year did they discover it?

[eaf1213]

How do you go about doing the Offer in Compromise? The only income they have now is social security. 

[eaf1213]

She would call and pretend to be her grandma and request a transfer each week. When they filed a police report they requested the recorded phone calls of the transfers and the bank would not give them. 

[eaf1213]

They didn't get anywhere with prosecuting because the bank wouldn't release the recorded transfers. 

[eaf1213]

2017-2018. They discovered it in middle 2018. Then the bank never sent them a 1099-R for 2018 because it was under investigation but they ended up sending one to the IRS.

[BobKamman]

Sounds like a CP2000 issued last year.  IRS sent a notice of deficiency, they did nothing in 90 days?  

[linden963]

The bank won't release the bank transfers to the police?

That doesn't sound right. The Detective has criminal subpoena power.

Was a police report filed?

[eaf1213]

Yes they responded to the CP2000 with an Identity Theft Affidavit. The IRS then sent this:

[eaf1213]

Yes, police report was filed and the bank was supposedly doing their own investigation. It got no where. I think the bank should be held liable because they should have picked up on the increased frequency of withdrawals. They should at least cover the tax and penalties. 

[IRonMaN]

Tell them to sue the bank.  And even better, talk to the local TV station.  They love stories where they can put senior citizens on the air telling about how they were swindled.  They love the stories even more when the bank says tough luck after giving away their life savings.  As a side note, banks don't like those kinds of stories as much as TV stations do.

[BobKamman]

And then what happened?  If the tax has not yet been assessed, a ticket to Tax Court costs $60.  That's less than the $205 filing fee for an OIC (some exceptions apply).  To whom is a stolen retirement-plan payment taxable?  Might be worth researching if the train hasn't already left the station.  Otherwise, an OIC is likely a waste of time.  Even IRS can't squeeze blood from turnips.  Or elderly people who seem to have just fallen off the turnip truck.  

[linden963]

Wow. This is a bad situation.

Their only option is to sue the Bank and the Grandchild.

Tax wise...there's no loss. The IRS stopped the theft losses in the year 2018. 

Please stay safe.

[BobKamman]

Most grandparents I know don't want to speak ill of their grandchildren in public.  But then, "Minnesota Nice" may allow for "Minnesota Nasty" in situations like this.   

[eaf1213]

This is actually for 2018. That's what year it occurred and they are just now billing for it. The client never received a 1099-R for those distributions so they never filed it on their 2018 taxes. The bank must have sent a 1099-R to the IRS without sending one to my client. 

[eaf1213]

That's the last response this far. This is my reasoning for asking about the casualty and theft form. I've never dealt with a scenario like this and want to make sure I'm taking the best option. Is filing the casualty and theft a waste of time? is it best to just go to tax court?

[BobKamman]

So it has been sitting at IRS since October?  The idea would be to avoid the issuance of a Notice of Deficiency so that a trip to Tax Court is not needed.  (A Low-Income Taxpayer Clinic could probably help with that, though.)  

The best argument, it seems to me, was that there was no distribution to the taxpayer.  The bank should not have issued the 1099-R, once advised that it was beguiled by a criminal.  

You can try to get the CP-2000 exam to the Service Center's "Independent (don't laugh) Office of Appeals," but my experience is that such requests are ignored.  Likewise, asking for help from the Taxpayer (don't laugh) "Advocate" will probably go nowhere because they'll say they don't get involved in audits.  

There's an interesting discussion of a similar case from 2008.  The name of the poster looks familiar, she might still be around if anyone recognizes it.  The message thread gets bogged down in an irrelevant discussion of what "basis" means for an IRA, but look at the comments by Koss.

https://forum.thetaxbook.com/forum/discussion-forums/main-forum-tax-discussion/7124-new-client-ira-s...

[sjrcpa · Accepted solution]

From the 4684 instructions:

Personal casualty and theft losses of
an individual sustained in a tax year beginning
after 2017 are deductible only to the extent
they're attributable to a federally declared
disaster. 

So you can't use this. Even if you could, there's likely no basis as discussed in the link Bob provided.

Go to irs.gov and lookup Offer in Compromise. The offer could be $1.

You said their only income is Social Security. Do they own property? They could wait out the 10 years after assessment for IRS to collect. Wat could IRS collect? Note: they can fgarnish Social Security - 15% I think.

Are your clients in a position to shoulder legal fees for their parents? 

Or can the parents find a law school legal clinic, or a community based organization to help them? It seems the bank is at fault here (in addition to the granddaughter).

[BobKamman]

IRS is not "billing" unless they sent a Notice of Deficiency and there was no response in 90 days.  Are you sure your clients read their mail?  If they don't remember receiving a 1099-R, maybe they don't remember receiving certified mail from IRS.  

[BobKamman]

Once they include it in income, they have basis.  That's why the discussion of basis is irrelevant.