IRA $$ Stolen

[J Simmons]

IRA funds were drained by the owner's son hacking into her IRA account online. Son took the money, a police report was filed, and son is facing felony theft charges under state law. The money is gone; used to pay off gambling debts.

The IRA custodial institutions were notified. They are investigating. The IRA owner has now received from those institutions Forms 1099-R reporting the funds taken by the son as taxable income to the IRA owner (the parent). It would be adding insult to injury if the IRA owner has to pay the income taxes due on the stolen funds.

Any suggestions on how to handle these Forms 1099-R with the IRS?

[Belgarath]

Other than asking a good CPA...

Perhaps this will help a bit? And I believe you can maybe deduct a theft loss on a Form 4684? But this is way out of my area of knowledge. My deepest sympathy to the poor lady with a loser of a Son.

Theft losses

A theft is the taking and removal of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and must have been done with criminal intent. The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero.

[Lou S.]

A good CPA or maybe even a tax attorney would be a wise move.

She could probably take legal action against her son but I'm guessing the odds of recovery on that front are quite small.

[Dare Johnson]

Here is a link to a case with similar facts:

https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/individual-not-liable-for-taxes-penalties-on-ira-distributions-obtained/1psdb

I don't think the participant would be entitled to a theft deduction.  The tax basis in the IRA is considered to be $0 since the income has not been subject to income taxes - unless there are non-deductible contributions.

[Luke Bailey]

Dare Johnson, that's a great case. J Simmons should definitely work with their CPA to see whether they can use it. Looks on point. That would be good, since the Tax Cuts and Jobs Act of 2017 basically suspended theft loss deduction through end of 2025.