1099 R Code K7

[BulldogTom]

10 hours ago, JohnH said:

I’m beginning to wonder whether the client knows more than they are telling you, but they’re already aware that the whole story is going to cost them money and they’re hoping to somehow slide by. 

is it possible this is rental property (or some other business asset) held in a self directed IRA and they titled it back to themselves because it couldn’t self-fund maintenance or repairs? 

John, you are good.   I did not think about that.  

I lost a client (owned a maintenance business) a few years ago whose new bride insisted they could use their IRAs to buy her home to have as a rental owned by the IRA and the IRA could pay him to do the property management.   They acted like the words "Prohibited" and "Transaction" never appeared in the dictionaries they owned.

Tom
Longview, TX

[TexTaxToo]

People have also tried to keep possession of gold coins in a self-directed IRA.  Of course, the IRS frowns on this:

https://www.thetaxadviser.com/issues/2022/feb/taking-possession-coins-irs-taxable-distribution.html

https://www.journalofaccountancy.com/issues/2022/mar/gold-coins-taxpayer-home-taxable-ira-distributions.html

This case may have led other custodians to be more careful about similar arrangements, resulting in distributions such as this 1099-R.

[JohnH]

Tom:  I've never dealt with a Self Directed IRA directly.  However several clients have come to me with schemes to use one for a rental property, or even to invest in a franchise business.  It seemed really popular among some franchising companies a decade or so ago - the franchising company would ally with a S/D IRA administrator to promote this as a way to buy into the franchise.  (Maybe they still do).  

After reading a little about the rules, and studying a few stories about how these schemes failed, primarily over "prohibited transactions" as you mentioned, I decided to never touch one.  I learned just enough about them to avoid them like the plague.  I'd just tell the client that if they moved ahead with the plan they would need to find another accountant.  Furthermore, I knew someone who was scammed by a financial advisor who set up a promissory note in a S/D IRA that even their family didn't know anything about until it blew up in their face. 

So I have a strong bias against these contrivances.  Not saying they never work or there isn't a place for them, but there's too much room to get tripped up by seemingly minor mistakes as well as lots of room for outright abuse.