I have an IRA which was entirely funded with embezzled funds. The employee embezzled funds from the employer into the er 401(k). The 401(k) distributed the account into an IRA. The IRA was distributed to the account owner. (The embezzlement information did not come to light until after these events.) I am thinking the appropriate code for the 1099-R distribution from the IRA is code 5 Prohibited Transaction as the account was funded by the employee who embezzled funds. The gross distribution would be the amount distributed,, the taxable amount would be the earnings on the distributed funds.
My thoughts are that it would be ok and be the closest explanation as to why taxes and penalty taxes are not being withheld?
What do you think?
