I have invested my 401k money in Real estate trust via Custodian. The real estate company bankrupted - Now my custodian keep charging heavy fee for the bankrupted company. I have closed the account so Custodian company sent me 1099 R shows on box 1 and 2a same amount( e.g $100k) however they also checked box 2b taxable amount not determined and put code 1K- if I Do not change amount of 2a I have to pay almost 25k in taxes plus 10% of penalty of the money which I never received - Custodian comapany say once you close the account we can not change and send you new 1099R- How to use this situation so I Do not pay taxes ( almost 35k) on the money which I never received( I received $0)
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I am still waiting to find out how to enter correctly to avoid any letter or audit from IRS.
Either I put 0 as a taxable income
Or I put 1099 r as is and then under other miscellaneous income I show -99500 to avoid taxes on money which I never received..
Custodians do have the ability to adjust your 1099-R by filing an amended form. They probably have an internal policy not to. You should tell them that if you don't receive a corrected 1099-R that you will be reporting them to the IRS for fraud.
An investment outside of your retirement account that becomes worthless is a deduction on your tax return as a long term capital loss in the amount that you originally invested. But the custodian company that you are dealing with has reported that they issued you 100 grand that they did not send. That isn't ok. Entering the investment loss will not wipe out that income.
You should plan on mailing in your tax return. You can either leave the 1099-R off of your return entirely (which is a risky move that will probably result in a lot of fun letters from the IRS) or enter an amount in 'Miscellaneous Income' (that's all the way at the bottom of the wages and income section) that is a negative of the amount on the 1099-R so that it wipes out the income. Then, you need to attach form 3949-A to report the 1099-R that you have received. Click here for more information on reporting fraud to the IRS.
If the investment occurred inside your retirement account then there is nothing you can really do about it. If the investment occurred outside your account then you should also enter the investment loss into your tax return as a loss due to bankruptcy. You do that by entering a 1099-B (which you don't have) that reports the amount as a stock sale. The purchase date and amount you paid for it you already know. The sale date is the date that you were certain that the investment became worthless and the sale price is zero. Here is some excellent information on Ponzi schemes to read.
When you send in the 3439-A you should attach copies (never send originals!) of your supporting documentation about the fact that you were never sent money by the custodian. Also, documentation about these fees that they've been charging you for managing a bankrupt company.
[Edited 3/21/24 04:49 PM PST]
As per custodian company when you close the account you agree that we send you 1099 and last known value as your original investment- I requested them several times when I agree it is common understanding you reported my original invested amount on line 1 but you listed on line 2a which indicate I received entire 100k while in reality I Lost entire amount.
I am planning to enter 0 on line 2a and if IRS sent me notice I can submit proof that I have not received any money.. Because sometime maybe IRS system does not catch and it will go through ...
Can you clarify something for me? In this case are you certain that the custodian company didn't distribute this money to you in order to invest in this real estate trust? Because if that's the case then the money was sent to you by the custodian and after they sent it to you it was lost. In that case the custodian would have no choice but to issue you the 1099-R because you took the money out in order to invest it. And you will have to pay taxes on it because you didn't pay taxes when you put it in.
No - I have old company 401k( pre tax) money which I invested to real estate agency as they are giving ads to very popular tv , radio network and all over big sign boards .
Real estate company use this trust comapany as a custodian.
Now real estate file for bankruptcy and the company declared as Ponzi scheme by Federal and state agency.
Investors lost 700 million dollars and I lost $99500.
Pre-tax money is money that you have to pay taxes on if you want to use it. In this case you did use it in order to invest in this company. In that case your 1099-R Is correct. You're going to have to pay the taxes on this money and then deal with the investment loss separately. The two aren't related.
I did not invested in custodian company
If I get anything back then I have to pay
And the fraudulent company has IRA products in which I rolled over via custodian company.
I do in kind transfer
If I took money and invested in non qualified account then I have to pay taxes but I did in kind rolled over pre tax money to pre tax IRA
Thank you for that additional information.
It sounds as if you had a Self-directed IRA.. This platform allows for individuals to use retirement account funds to invest in alternative investments such as real estate, but the valuation of the investment is a task typically managed by the individual, not the custodian.
In order for your distribution to not be taxable at the full rate of your initial investment, you must provide the custodian company a written appraisal or other valuation document prior to closing the account.
Otherwise, you end up with a distribution for the full amount of the initial investment since it's the last official value that the company has on file. It sounds like that is what they're stating when they point you to their agreement that states that upon account closure they will report the last known value.
In a typical IRA, the values can be derived daily by the custodian from publicly available information, but this isn't the case with real estate.
It isn't immediately clear what, if any, recourse you may have that will let you adjust that valuation with the custodian or on your tax return.
There may be additional recourse available due to the declaration of the investment as a Ponzi scheme. However, these aren't things which TurboTax is equipped to handle.
As it stand right now the IRA custodian has issued to you the document the only way that they can. They can't just take your word that the value is $0 (even if they "know" from other sources). There must be documentation their files which must meet IRS standards and conform to the custodian's policies and procedures.
The IRS records are going to reflect this as taxable income to you in the amount of your full initial investment.
I recommend that you file an extension for your 2023 tax return and reach out to a local professional near you who's well-versed in self-directed IRAs and/or real estate investments. It may take you a little time to find the best person and I would start with CPAs and tax attorneys.
You have a lot at stake here, and there may be some legal or other avenues that you can pursue for a late adjustment to the value or because of the Ponzi/bankruptcy element.
You nailed my situation completely correct.
I have requested my current CPA as well as couple of other CPA to write me a letter that the company is in bankruptcy and letter of valuation indicating worth less investment
They understand but refuse to give me a letter on certified letter head.
What is other suggestions besides extensions as I am getting refund from both federal and state government.
Can I file and see if I m lucky as sometimes it won't catch in IRS system.
Or even IRS sent me cp 2000 I can detailed explain them at that time and tell truth that I am not aware if I close account I am getting 1099 for money I never received as a taxable?
The IRS is likely to consider the phantom distribution as taxable to you. There are many cases where no money changes hands, and the IRS considers there to be a taxable event.
Given the amount of money at stake, I can't suggest that you take chances that they won't catch it or that your explanation will be enough to satisfy them when they do. Interest and penalties will be added to the tax when they issue the CP-2000, and I don't want to see you in that situation.
In addition to checking with additional CPAs, you may want to reach out to tax attorneys in your area. An experienced attorney may be able to help you navigate this in a way that is more favorable to you.
Thank you very much for your detailed information.
Let me ask you I understand it's IRS but do IRS people that mindless to pay not only taxes but 10% penalties on the money I never received?
I understand I made a mistake to close the account with custodian but swear to God I did not know that they send me last known value as a taxable amount with code 1k.
So if I present my case they are that stupid and heartless to pay me taxes and penalty on never received money as well as I lost entire retirement savings..