It was April 22, 2016, when our member first reported a notice he had received from the IRS, pertaining to a 1099R for $115,000 that had not been included on his tax return and resulting in an amount due of $38,000. Upon contacting the member, I learned that he had no recollection of the company that had issued the 1099-R, nor did he recall receiving the referenced $115,000 in income. I informed him I had already conducted some research on the organization and discovered that they were a self-directed IRA company.
After a lengthy conversation with the member, I determined it would be appropriate to request a payor letter from the IRS, asking for proof that this distribution existed. The taxpayer insisted that the organization issuing the 1099-R was attempting to commit fraud after he discovered they had a number of negative BBB reports. I explained that the negative reports did not necessarily indicate a scam and asked the member to contact them and see if he could get any answers regarding this distribution.
The member then contacted the company and discovered that, back in 1998, he had invested $122K of IRA money in a Joint Venture that this company was administrating. They had paid themselves over $7,000 in fees and, once the account was depleted of the funds necessary to cover those fees, sent invoices to his old address. During this time, the member had moved from California to Florida and had since lost track of this investment. The organization also informed him that they had been audited and, in turn, were required to issue him the 1099-R he had received.
At this time, I explained to our member that self-directed IRA custodians have a fiduciary responsibility to issue an annual report to the IRS and provide the value of the IRA so that, when the RMD starts, the taxpayer knows how much to withdraw. I then asked the member to grant me Power of Attorney for all open tax years so I could review the 5498’s. Additionally, I informed him that the new Consumer Financial Protection Bureau might be able to assist him as well and requested that he file a complaint with them. The member quickly followed my advice and reached out to file a claim, requesting they contact the IRA company and have them issue a correct 1099R.
After being granted Power of Attorney over this member’s case, I began to review the prior year Wage & Income transcripts and ascertained that there were IRA Contribution Information documents (5498’s) in the amount of $115,000 for all years I could access. While I could not see what dates these had been issued, it was very clear from what the member stated after his conversation with the company that the investment had gone to zero.
Sixty days passed since I had initially requested the IRS issue a payor letter, so I reached out to them to follow up. I was connected with an examiner and told her that, at the outset, the taxpayer had no idea why this 1099R was generated. However, upon further investigation, he was able to locate the necessary paperwork that reminded him of this $122,000 investment with this organization back in 1998. I informed her that the company had charged him over $7,000 in fees. However, the investment had become worthless and no money had ever been distributed from the company; they had only issued the 1099-R after their records had been audited.
Upon review of the case, the examiner noted that the payor letter had been issued to the organization, but the IRS had never received a response from them. She was able to resolve the issue over the phone and closed the case with a zero balance due. This was so much better than the $38,000 that the member was originally going to owe, and she was thrilled with the result!
The moral of the story? If you are going to invest in a self-directed IRA, make sure you understand the fees involved in it and then keep track of the investment once you make the commitment. By being intimately involved in the process, you can receive great benefits, such as tax-free profits, tax deductions, asset protection, and estate planning, that have the potential to create lasting wealth for you and your family.
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