1099-R has a 7K distribution code--IRA custodian imputed non-existent income from bankrupt investment

[alevit]

I received a 1099-R from an IRA custodian that was holding a now-bankrupt real estate investment. This investment value was 0 as of the time I requested to terminate the account in August 2022. Although there had been hope for some recovery of assets in this proven Ponzi scheme (one of the property owners is doing 11 years in prison for fraud), no further assets are going to be recovered. Bankruptcy had already played out over the prior year.

Still, the custodian imputed the maximal potential value of the assets at the time of my terminating my IRA account. I was never sent nor did I otherwise receive one cent from this bankrupt real estate investment, yet I am seeing imputed income (Gross Distribution) of more than $10,000 which seems to have increased my AGI by exactly the same amount. The Distribution Code is 7K--the K refers to uncertain Fair Market Value. 

How can I deal with this to avoid paying tax on a faulty imputed value? I see that line 4b on the 1040 would allow me to explain the "taxable amount" of my IRA distributions. Could I just subtract the $10,000 from line 4a and attach a letter of explanation? Will TurboTax allow that? BIG THANKS for any answers.

[Vanessa A]

No, you would not be able to attach a statement.

You would need to contact the payor to have them retract the 1099-R. If they are unwilling to, you will need to contact the IRS at 800-829-1040.  You should not include this form on your return when it is not correct.  If you never received any of this money, then it is not income to you. 

If you do not receive a corrected form showing that you did not get any money from them, then you would need to file using form 4852.  If you need to include form 4852, you will need to print and mail your return as it cannot be e-filed.