Exceptions to Penalty for early withdrawal from IRA

[juham2013]

I have reviewed all the exceptions to penalty for early withdrawal from an IRA,  but none apply to a tragic situation encountered by my spouse.

In 2022, my spouse was the victim of Identity Fraud which we reported to the local Police, sitting down with a Detective, specializing in these types of cases (the Police issued copy of the "Incident Report").  The police told us that the type of extortion that we reported is unfortunately quite common. Also, we mailed a letter to the IRS, along with copy of the "Incident Report" and more details on the early withdrawal, asking them for advice on ways to "reverse" the Penalty paid.  The letter was mailed more than 6 months ago,  but we have as of today's date, not hear back.

What took place was that my spouse was called by an overseas individual (claiming to be a police officer), leveling incredible accusations, demanding that unless they receive money, they would ask U.S. authorities to intervene.  The phone number looked entirely legitimate (phone numbers can be easily phished as well, based on what the Detective told us) so my spouse got visibly extremely distraught, thinking that the caller was truly contacting on official business.  Again, this tactic is very typical in scams such as the one we reported to the police.  

So, with the above in mind, my spouse decided to withdraw funds from an IRA (there was no need to do that at all ,but given the the amount of money these criminals demanded, there was no other way but to withdraw all of the funds in the IRA account).  Fortunately,  my spouse did NOT wire any of the funds to these criminals (I urged my spouse to NOT do that but report this to the police).  However, the Penalty for early withdrawal needs to be paid (that is quite clear from filing our returns just now).

What can we do?  Given the lack of any letter from the IRS, perhaps there is a way to obtain some relief or reversal of the Penalty paid in the tax year 2023 or later,  assuming that we get a decision by the IRS through mail in 2023.

Awaiting suggestions!

Sincerely,

JJ

[Bsch4477]

As you posted, your situation does not meet any of the requirements for waiving the penalty. 

[JohnB5677]

I know you've been through them, and I've also reviewed the Exceptions to the Additional Tax on Early Distributions and didn't see anything.

You will probably have to wait for an IRS response, but you can contact a local IRS office and request a tax advocate.

You can contact a Taxpayer Assistance Center Local IRS Office. Enter your zip code for a local office.

If this does not completely answer your question, please contact us again and provide some additional details.

[juham2013]

I realize that you are not a legal professional and there may not be any on this forum,  but I hope that someone can chime in and provide suggestions or ides to explore other avenues.

JJ

[juham2013]

Thank you for your suggestions.

I sure hope that cases like this one will see resolution in future and that whatever remedy the IRS suggests or decides on can be applied retro-actively.  For obvious reasons, I am having to remain a bit "vague" on some of the particulars in this case.

Sincerely,

JJ

[BillM223]

It is, as you have found, difficult to undo a distribution from an IRA. 

Indeed, the IRS says, "There is no exception to the 10% additional tax specifically for hardships."

Take John's advice and talk to a Taxpayer Advocate at the Taxpayer Advocacy Service, and see what they say.

[juham2013]

Thanks Bill and John!

[dmertz]

The tax code does not give the IRS any authority to waive the 10% early-distribution penalty for any reason other than the reasons listed in the reference provided by JohnB5677 .

Even if your spouse was able to come up with funds to be able to complete a rollover of the distribution to avoid the penalty and to continue to defer the taxable income, the 60-day rollover deadline has passed.  The circumstances are not one of the IRS-listed reasons listed in IRS Rev. Proc. 2020-46 that would permit your spouse to self-certify that the rollover would qualify for a waiver of the 60-day rollover deadline.  The only recourse to avoiding the penalty would be an actual Private Letter Ruling by the IRS permitting a late rollover, but it would likely cost $12,500 plus attorney's fees to file such a request with no certainty of a favorable outcome.