Any tax owed must be paid directly by the IRA by the IRA trustee not by you with an IRA distribution. Perhaps the K-1 did not have the IRA box checked or did not name the IRA as the holder. If it did did, then the IRS is wrong.
Unrelated business income is reported on a 990-T form.
If you hold a Limited Partnership or LLC in your IRA then any Unrelated Business Income in excess of $1,000 is taxable (even though it is in an IRA). It is not reported on your tax return but on a 990-T form. (The custodian of your IRA is required to file the form for you but you must submit the K-1 form(s) to them - ask the custodian about this).
Unrelated Business Income is reported as code "V" in box 20 on the K-1 form.
Also see pub 598.
http://www.irs.gov/publications/p598/ch01.html
Per the 990-T Instructions: https://www.irs.gov/pub/irs-pdf/i990t.pdf
"Who Must File
Trustees for the following trusts that
have $1,000 or more of unrelated trade or
business gross income:
1. Individual retirement accounts
(IRAs), including traditional IRAs"
4. Roth IRAs described under section
408A,
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
