Asking the IRS to recalculate current and past RMD’s

Submitted by Don Truesdell on Wed, 2017-03-15 15:12

Unfortunately I’ve become aware of a family member who invested his life savings with a fraudulent advisor. This person is 95 years old and invested in private notes that are now in default. These notes were valued at par in the IRA account since they were purchased 6+ years ago, even though it has been determined that the company was cash flow negative since 2012 and potentially insolvent (this is an ongoing situation). The 12/31/16 IRA value therefore is substantially overstated, and because of the age of client, has resulted in a very large RMD. Due to his now much reduced investment base the taxes associated with this RMD now represent a material percentage of his net worth. So my questions are:

1) Do you think the IRS would consider recalculating his IRA account value and therefore his 2017 RMD?
2) It’s clear to me that these notes have been overvalued given the company’s financial condition for the past 5 years. Is it possible that the IRSy would consider recalculating his past RMD’s and give him a tax credit for taxes paid?

I acknowledge that these are private notes and substantially difficult to assign a value to. However, there is some clarity to near term cash flows. My very rough guess is that client will ultimately receive somewhere between 25-60% of original value.

We’d be extremely grateful for any guidance you could provide in this very unfortunate situation.

Thank you.



Submitted by Alan - IRA critic on Wed, 2017-03-15 17:28

  1. The IRS is unlikely to get involved with determining valuation. They would probably require the IRA custodian to agree to a reduced value and issue a corrected 5498 or statement of 2016 year end value.
  2. Is this a self directed IRA custodian?  Perhaps they would indicate what facts the family member could provide to them to warrant re consideration of the value.
  3. Re visiting the FMV or prior years is highly unlikely.
  4. If there is no assistance offered by the IRA custodian, the person might consider an aggressive approach by documenting a reasonable estimate of the FMV on 12/31/2016, then taking only the RMD indicated by that value. If the IRS ever attempts to levy the 50% penalty on the shortfall, then he could appeal the penalty using Form 5329 and citing reasonable cause.
  5. Any chance of collecting damages from this advisor or his firm?

Submitted by Don Truesdell on Wed, 2017-03-15 18:30

Thank you very much for your response. I wasn’t aware of the 5329 approach.  I thought the only way to challenge a specific IRA issue was through a PLR which @ $10,000 would be prohibitively expensive in this case, so thank you for that suggestion.Yes, it’s possible.  This is the most egregious case you can possibly imagine. Thank you again.

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