Ponzi scheme IRA valuation
A Ponzi scheme was discovered in 2012, and the investors who were victims of the scheme are now trying to determine their 2012 required minimum distributions. The custodian unknowingly recorded a fictitious value as of 12/31/11, but it is now known that some of the assets had no value. Can the investors adjust the values of their IRAs this?
Permalink Submitted by Jose Morales on Tue, 2012-11-13 17:09
The first step should be to contact the custodian to ask if they are aware of the ponzi scheme and if they plan on providing corrected 5498s to show an adjusted year end valuation. If they are aware of the ponzi scheme (Zeek Rewards?) they may already be in the process of doing this, or they may be in contact with the IRS and awaiting clarification before they take any action. Make sure when you call the custodian that you are not speaking to a general customer service employee. Ask to speak to someone in the IRA department, specifically someone responsible for the tax reporting and tax reporting corrections.
If the custodian is not willing to cooperate or lacks the resources/knowledge to provide corrected 5498s then the only strategy that comes to mind would be to document what you feel is the correct IRA valuation and make the adjustments to the RMD amount for 2012. As the amount you take in 2012 will be less than what will be reported to the IRS as your client’s RMD, you will want to complete a form 5329 with the client’s tax filing showing that they withdrew less than the RMD amount reported. For the penalty amount I would write “0” and there will be an area designated on the form to explain your reason why you should not be subject to the excess accumulation penalty. I would write up a very thorough explanation with your best argument for adjusting the year end valuation of the IRA, resulting in the lower RMD amount taken and attach it to the 5329. There is no guarantee that the IRS will accept the adjusted amount, but if that is the case then it would have been inappropriate for the custodian to adjust the 5498 to begin with.
Permalink Submitted by Joe Luby on Tue, 2012-11-20 17:45
Keep in mind that it is the custodian’s responsibility to properly value the assets in the IRA. For example, assume the client held 100 shares of GE stock in the IRA which had a market value of roughly $2,000. Neither you as the advisor nor the client would sit idly by if the custodian reported it with a value of $50,000 for tax calculations regardless of their reason (e.g. software glitch, etc.). The same should hold true with an alternative type asset that turned out to be a worthless ponzi scheme investment. If they’re valuing it at say $50,000 as of 12/31/11, and information is now available to confirm this value was incorrect, then the custodian is responsible for filing a corrected Form 5498 to properly update the value.