lost check cashed by some one else

[Pacun]

Client asked for a lump sum retirement, had an emergency and traveled for more than 2 months. Check for $200,000 was sent to his house was deposited by someone else. Person that deposited check closed account and dissapeared. IRS wants his share of the $200,000 reported on 1099-R. What would you do if client came to you with these facts?

[Tax Bird]

Client asked for a lump sum retirement, had an emergency and traveled for more than 2 months. Check for $200,000 was sent to his house was deposited by someone else. Person that deposited check closed account and dissapeared. IRS wants his share of the $200,000 reported on 1099-R. What would you do if client came to you with these facts?

Off the top of my head, I would show it in the return as a theft (I think the casualty form is for casualty & theft). This assumes that the TP reported it to the authorities and has the documentation to substantiate the theft and subsequent investigation.

[OldJack]

I agree with Tax Bird unless it really is not a theft. The question has to be asked... How would someone else deposit the check, withdraw the money, and close the account unless they had legal access to the bank account? If so, there would be no theft. Is this a husband/wife family breakup situation? Seems like a case where you have to determine more facts before judgment.

[Pacun]

Thief was not related to my client. My client invested $8,000 on this retirement account when he was a teenager. Hi is now 70 years old. He does not have any other itemizable deduction on the year in question.

[jainen]

>>He does not have any other itemizable deduction<<

Theft/Casualty on Schedule A can create a net operating operating loss to carry to other years until it is used up. I'm not sure it was a theft, though, since apparently the suspect had direct access to your client's home and bank account. I presume he knows who it is, so a police report is essential. They may look at it as elder abuse even if the person was authorized to handle the money.

[Pacun]

Thief forged his signature and deposited check on thief's account. Keep in mind that his basis was 8K.

[zeke]

Thief forged his signature and deposited check on thief's account. Keep in mind that his basis was 8K.

i have a hard time with "receipt". i do not believe he had income, therefor no need to report loss.

zeke

[zeke]

if the taxpayer never got the check, then he has no income to be reported!

[Pacun]

i have a hard time with "receipt". i do not believe he had income, therefor no need to report loss.

zeke

You mean that he needs to pay taxes on $200,000 since IRS has 1099-R? That's the answer I am getting from everybody since his basis was only 8K and there is no way he can itemized with only that loss.

So, not only he lost $200,000 but he also has to pay taxes on it? Keep in mind that he did nothing wrong.

[joanmcq]

What has he done to recover the money? Has he filed a police report, contacted the check issuer that the check was stolen, contacted the bank that cashed the check (should have had to show ID, etc to cash it)? If someone stole $200,000 I'd raise holy hell with everyone involved. If the check was stolen from the mail, it's mail fraud and a federal offense, as well as a felony.

[zeke]

You mean that he needs to pay taxes on $200,000 since IRS has 1099-R? That's the answer I am getting from everybody since his basis was only 8K and there is no way he can itemized with only that loss.

So, not only he lost $200,000 but he also has to pay taxes on it? Keep in mind that he did nothing wrong.

just the opposite - from the facts in evidence, he never had receipt and should NOT report the income in the first place. We can conjecture additional facts that might indicate "constructive receipt", but i would expect that to be the job of the irs. Yes, I would still be looking for the $200K, & if rec'd it would be reportable in year of receipt - not year(s) ago accruing penalties & interest. and as long as i might recover, i have no loss.

[jainen]

additional facts that might indicate "constructive receipt"<<

I would say that "Check for $200,000 was sent to his house" is all the facts needed for contructive receipt.

>>i would expect that to be the job of the irs<<

You know that's not how it works--guilty until proven innocent is the IRS way! Seriously.

Pacun, you got a lot of response to this sad story. Some of our questions might make a difference, such as who this forger was (the bank has his SSN and other ID) and what the client has done about contacting the bank, the retirement fund, his insurance company, and the police. How about giving us a little more info?

[kcjenkins]

You mean that he needs to pay taxes on $200,000 since IRS has 1099-R? That's the answer I am getting from everybody since his basis was only 8K and there is no way he can itemized with only that loss.

So, not only he lost $200,000 but he also has to pay taxes on it? Keep in mind that he did nothing wrong.

Pacun, actually, he has NO BASIS in the account, if it was an IRA, because that $8K was pre-tax contribution.

As for the income, if he had a check coming to his home for an amount that large, and he left on a trip and made no arrangements for having it held at the PO, or directed to another address where someone responsible could safe-guard it for him, or deposit it for him, perhaps he can get consideration on the basis of mental disability. [This is not a joke, it's a serious suggestion.]

How did the person who cashed it get the check? Did he have permission to enter the house, or did he break into the house and steal that along with other things? Is the person known to the client? Was a police report filed? If the endorsement was forged, has he talked to a lawyer about bringing suit against the BANK that allowed it to be deposited into a bank account not in his name?

You are leaving us with a lot of unanswered questions, many of which answers would affect the advice we would give you. Perhaps you can give us more of them?

[Pacun]

Client contacted Retirement office and was told that there was nothing they could do because the check was cashed. They sent my client a copy of the check showing that it was signed (supposely by my client) and deposited to the thief's account. They suggested that we filed a police report and we did.

We contacted the bank, and they said that the deposit was made on an ATM and that they followed the government rules and therefore, NOT responsible.

By the way, have you seen those houses where there is a box next to the door where the mail person deposit the mail? No need to break anything in order to get the mail... that's the standard throw out the U.S., isn't it?

IRS has a 1099-R from the retirement company and needs my client to pay taxes on that money reported to them.

[zeke]

We know the retirement office SAYS they mailed the check.

We know t/p did NOT rceive the check.

We know the check was deposited to another's account w/o consent of t/p.

I have read and respected this board for YEARS, saying little because I don't claim to have the knowledge exhibited here, and yes, I was also "caught" on the wrong side of the post referring to the ipropriety of a negative entry on line 21.

Yes, there is a smell factor and we need more info. From the facts presented so far, I would still argue that "constructive receipt" has not been shown, and if i had my choice, i would much prefer to represent t/p non-receipt issue vs IRS "constructive receipt" - and, the tax, penalties & interest from years ago on $200K is an amount worth arguing about.

Now, this poor weak mind respectfully requests that Pacun, Jainen, K.C. & any others interested please comment further. I would really hope that SOMEONE/ANYONE agrees with me!

zeke

[jainen]

>>"constructive receipt" has not been shown<<

If this were my client, I would certainly argue that the taxpayer never received the money. But I would not expect to win that point. Constructive receipt has nothing to do with actual receipt. The taxpayer was entitled to the money and gave instructions for its mailing; therefore he controlled the funds. He could have given another address or made other arrangements for handling his mail during his absence. The fact that he chose to not do those things is not relevant to the question of constructive receipt.

That would not prevent me from representing him in vigorously contesting the taxes. If he were my client, I would need to confer with him about the most effective way to approach this. Offhand, theft/NOL seems a more promising argument to me, with a fallback position of limiting Collections.

With 200K at stake, he could surely find an attorney to challenge the bank and the homeowner's insurance, and give the police a push.

[zeke]

"therefore he controlled the funds." my point precisely! he did NOT control the funds. He wanted to. He tried to. NOTHING shows receipt.

"He cound have given another address" & Katrina could have blown the post office away, or the dog ate the mail - all irrelevant. All we know is that someone else spent his money BEFORE he got it.

Thanks Jainen for your polite, well reasoned response, but feel free to "cut loose" I won't break.

I have been wrong before, will again. I guess I will just have to emulate Cool Hand Luke - he couldn't get his "mind right" either....

zeke

[Pacun]

Can you break down the benefits of Theft or NOL if (as KC correctly pointed out) his basis is 0? Also consider that this client will no longer work.

Based on all the answers I am getting, I have the feeling that everybody, except for Zeke, is saying... you lost your money and now you have to pay more than 50K to the IRS and more than 15K to the state. I feel that you are telling my client... since you are wrong, not only you lost your money and have to pay the IRS and the state BUT YOU ALSO are responsible for paying interest, penalties for not paying and penalties for underreporting your income by more than 75% and other penalties as the IRS and state WISH to impose on you because IRS is right and you are wrong.

Am I correct, or I just got you offguard with this question? Which one is it?

(Please do not think that I am taking this personally, "this is strictly business", Nice quote, isn't it? lol).

PS. Thank all for reading and answering my post, I appreciate your efforts.

[Mike D]

Client asked for a lump sum retirement, had an emergency and traveled for more than 2 months. Check for $200,000 was sent to his house was deposited by someone else. Person that deposited check closed account and dissapeared. IRS wants his share of the $200,000 reported on 1099-R. What would you do if client came to you with these facts?

[Mike D]

The first thing that comes to mind is that if in fact this check was stolen and fraudulently endorsed the institution that cashed and/or credited funds against this alleged fraudulently endorsed check is fully liable to the payee for any and all associated losses. This is banking law 101!

Unfortunately I agree with the IRS in that they show a distribution where the check appears to be cashed by the taxpayer!

I would gather all of the relevant documentation and ask to meet personally with the IRS to discuss the merits of these issues. I sincerely believe that minimally you would be entiltled to a casualty loss!

Let us all know how you make out.

Michael M Dubin CPA

[Gail in Virginia]

This is certainly an interesting situation, and I am not sure I understand it well. I really don't see how the bank can claim they have no responsibility for ATM transactions - it is my understanding all deposits are subject to verification. Also, was the check deposited in the name of the retiree? In which case, the fraud occurred either when the account was opened or when the money was withdrawn.

The IRS used to love cash flow audits - would that show that your client never received the money?

Finally, the IRA account itself was not stolen but rather the distribution from the account. If the distribution has to be reported on his tax return for $200,000 wouldn't that mean that what was stolen was cash with a basis of $200,000?

Just my thoughts - this is way outside of my experience. I would ideally like to see the thief caught, your client's money recovered and then pay the IRS in the year he actually received the money. What will actually happen is probably not that they all will live happily ever after.

[jainen]

>>the benefits of Theft or NOL if (as KC correctly pointed out) his basis is 0<<

KC said the ACCOUNT has no basis, for purposes of determining income on distribution. His basis in the $200,000 cash (or equivalent) that he lost was $200,000. An NOL can be used to get a refund of tax for prior years, and prevent tax in the future. It will, for example, help ensure that Social Security is non-taxable.

>>everybody, except for Zeke, is saying... you lost your money and now you have to pay more than 50K to the IRS<<

I believe he was subject to tax when he withdrew the money, regardless of what happened after that. But I never said your client was "wrong," and I offered several different theories and reasonings for avoiding payment. Your question did not catch me off guard. I believe a professional tax representative could accomplish quite a bit, and I also suggested other professionals who could help him.

>>do not think that I am taking this personally<<

You know, I am a little shy this morning of expressing personal opinions. Nevertheless, I have observed that you were not very responsive to our questions about why exactly this incident should be considered a theft. Perhaps watching too much CNN recently makes me wonder if a person who doesn't answer questions doesn't want the answer to be known.

[Pacun]

My original post was made yesterday at 3:16EST. I provided 3 replies to questions yesterday. Today when I woke up, I provided more answers to questions possed. We are going to the right direction but I know a lot of us would like to see a solid answer.

I like the idea about going after the bank that allowed the deposit. I have noticed that some banks do not allow you to deposit someone else's check but some other allow this type of transaction.

If this person would be working for the next 65 years, 3K yearly of passive NOL would be perfect. Unfortunedly, life is too short. It would be nice if this person had a bunch of money making money so that passive NOL could be use up earlier, but that's not the case either.

[joanmcq]

First, a few points. Zeke, 'constructive reciept' in tax terms has a specific meaning codified in law. The taxpayer has constructive receipt of the funds when the check is mailed to him. this usually comes up when a check is mailed at the end of the year, but the TP doesn't get it until the following year and tries to claim the income in the following year. By the rules of constructive receipt, the income is taxable in the year the check is mailed. Pacun's client had constructive receipt of the funds.

Second, the ATM excuse by the bank seems weak. A check that large could not have cleared quickly or been withdrawn until the check cleared.

Third, if this is coming up in audit, I'm assuming the taxpayer got a CP2000 or 2501 because he didn't put the income on the return. Therefore this happened in 2005. One thing we are asking is what happened since then? Who did the crime? As I pointed out earlier, mail theft is a federal offense, if the mail was snatched from a mailbox as you infer. However, if he was gone for a few months, I'm sure he had someone taking the mail out, or you run into overflow issues. So was it stolen from his house, or the mailbox? What was the police response? Thats just some of the questions about the crime itself.

Lastly, why would this be a passive NOL?

[kcjenkins]

As Mike just pointed out again, Pacun, the real issue is that the BANK has a responsibility not to deposit funds made out to Joe Doe into an account in the name of John Roe, unless they have verified that the endorsement is valid. The very nature of this transaction is highly suspicious, so the bank had a duty to your client, which they clearly did not exercise. I'd be hiring a good bulldog attorney and threatening them with massive bad publicity, over this one.

It's one thing if it was a check for $200, but when the amount is so large, and the money is going into an account that your client was not a signatory on, that is a real problem. While this is a great example of why someone who has to travel out of town should put a hold on his mail with the PO, that does not mean he has no leverage with the bank. Do you think any bank would want this sort of publicity?

Yes, the guy does have 'constructive receipt', as the IRS will see it. He asked that it be sent to his address, and that was done. The check was endorsed, and cashed. He's going to have to prove that it was stolen and never in his hands, and even then he may not win with them. I'm not saying don't try to fight that line. It may be the best you have. But don't accept the bank's 'not our fault' argument, either. Banks do have a fiduciary responsibility not to just blindly accept any deposit, when the check being deposited does not go into an account belonging to the person the check is made out to. And that is the best chance he has of actually getting his money.