Bungled Charitable IRA Gift remedy?
We requested three checks to satisfy 2008 RMD’s from my client’s IRA – including two payable directly to churches (qualified charities) – Unfortunately – IRA custodian processed full RMD payable to client alone and client deposited the check. Two questions:
1) Is it impossible to correct once funds have been deposited by client?
2) If impossible to correct – Could client claim Charitable Gift distribution with documentation of original request / distribution forms and copies of subsequent checks payable to church from the client? Do you think this documentation would stand up to an IRS audit?
Thanks for your input.
Paul Sponseller, CFP
Permalink Submitted by Alan Spross on Wed, 2009-01-28 23:08
Paul,
Only one check was issued to the client and no checks were made out to the churches? What date was check to client received?
Permalink Submitted by Paul Sponseller on Thu, 2009-01-29 15:20
Alan:
One check was issued to client and deposited in Dec. 08. We submitted three distribution requests – Two requesting payment to churches – one for a residual amount to the client.
I’m looking for an opinion of the potential of success in an audit given these circumstances:
1) We have a LOI and Distribution forms requesting direct payment to churches
2) We have copies of checks payable from client to churches for the intended amount that should have been distributed by custodian
3) The trustees mistake is the only cause of the gifts not being made payable directly from the IRA (as I realize is required)
Thanks for your input.
Paul Sponseller, CFP
Permalink Submitted by Alan Spross on Thu, 2009-01-29 23:22
This is a tough call as I do not know how the IRS has addressed this in the limited history of the QCD, or of any letter rulings that apply. There appears to be two ways to go:
Conservative:
Request a PLR allowing the QCD to be reported as such. Extend the 2008 return and pay the tax due in April using the prior method of an itemized deduction for the contribution. Amend the return if the request is approved, since there will not likely be a response prior to October filing deadline.
Aggressive:
As you know, the QCD is not reported on the 1099R and the taxpayer reports it on 1040 line 15 using the same approach as an IRA rollover for the QCD amounts. He could do this, keep all documentation that you already have as well as the receipts from the charities, and hope he will not be audited. If he is, the IRS may not be happy that he did not ask for relief up front.
Either way: The IRA custodian at fault should be put on notice that their error may result in additional costs to the client. Calculate those costs using both the QCD direct contribution reporting vrs the itemized deduction reporting of indirect contributions. Perhaps demand that the firm pay the up front cost of a letter ruling and other estimated costs including the additional costs of tax preparation.
Obviously, the amounts in play here would affect the above decision, both the dollar amounts of the QCD and the difference in tax cost between the two reporting methods. There is added complexity if taxpayer has a basis in his IRA (Form 8606).