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IRA Prohibited Transaction Reporting


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The owner of an IRA engaged in a PT in 2011.

We know the consequence is all assets in the IRA are treated as having been distributed to the owner at their 1/1/2011 value and the account is no longer an IRA as of that date.

We're planning on filing amended individual income tax returns for 2011 and forward and reporting the deemed distribution on the 2011 return (fortunately the owner was over 59 1/2). We'll also report all investment income/expenses and realized gains/losses in the account as adjustments on the amended individual returns along with backing out the RMDs.

We're assuming the investment holding period for purposes of determining whether realized gains/losses are short or long term started at the 1/1/2011 deemed distribution date.

Does this sound like the correct reporting? Does the IRA custodian have to file amended 1099-Rs and Forms 5498? Anything in the way of other disclosures/reporting that we should be concerned about?




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Are you assuming a 6-year SOL on the 2011 1040?  If so, when does it expire?  If it expires 4/15/18, or if it was a 3-year SOL that expired long ago, maybe more thought needs to be given to this. 

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Fraud is a fairly high bar, but you have the facts and I don't.  Not sure what your role is here, but, and with complete respect, if you're not an experienced tax controversy attorney and the dollars are significant enough the client should consider consulting with one.  I'm not that type of attorney either, so I am sure I would recommend the same thing if he/she were my client.  

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I don't think you're going to get the custodian to file an amended anything, even assuming your analysis of facts and application of law are impeccable. Have you even got them to the point of not reporting the current fair market value as a taxable distribution in 2018?

Assuming there was a PT in 2011 and that it involved the IRA owner (which IRS could kick the tires on if the assets are greatly appreciated so that LTCG reduced rate of tax outweighs the tax deferral), then you're proposed handling is consistent with our experience and thinking. Note that one thing to weigh in the analysis re whether to delay dealing with this and thus potentially have even 6-year statute run, in addition to the potential ethical and related issues (on which I take absolutely no position here), is the duty of consistency. We know that if the 6-year statute did run, the IRS would take the position that IRA owner had zero basis in distributed assets, and that case law would support IRS on this. If you waited beyond 6 years and zero basis, would you have a start date for your CG holding period? Just a question. Assuming you do file an amended return for 2011 and pay ordinary tax on then value, would seem like IRS could not challenge the basis or 6-year holding period. But there is no case exactly on point to best of my knowledge.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Ok.  Will there be years subsequent to 2011 where you'll actually be requesting refunds due to "backing out" the RMDs?  It would be interesting to hear how the IRS reacts to that.  Also, assuming the SOLs for 2012, 2013 and 2014 are already closed, what are you going to do for those years for which the client was short on taxes?  (The IRS can't grant a refund if client was overpaid for one or more of those years.)   

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