New client with stolen IRA

[joanmcq]

New client comes in. A few years ago she was in a bad accident and an old friend helped to care for her. This so-called friend got her financial data, set up joint accounts, stole her identity, transferred clients other accounts to the joint account, and robbed her blind, including rolling most of her IRA into a new account, taking at $100K+ distribution and fleeing to Texas. She didn't look at her statements, and didn't know anything was up until her checks started bouncing. Turns out multiple credit card accounts were also opened, and thief even got mother's money which was in a joint account with the daughter. Police report is filed, but Vanguard issued 1099-Rs for the distribution. Police have tape of thief's voice authorizing distributions.

What to do? Even though taxes were withheld she owes over $13K, including early w/d penalties. On another board, it was suggested that since she did not authorize the distributions, nor get the money, she should not have to pay taxes on it, or penalties. The only money she has control of is the withholding, which IMHO she should get back.

What to do?

[Mel in Hawaii]

If she didn't get the money, contact the company holding that IRA and start bugging them to put the money back along with all the withholding. Similar thing happened here, took a while but eventually the bank had to eat it (I am sure some insurance company actually did, but you know what I mean).

[Slappy Tax]

To state the obvious, there's alot going on with your client's situation, but I think insofar as the IRS is concerned, she's going to end up with a casualty/theft loss. I drafted a big long response, which I can still post if you'd like me to, but it boils down to a casualty/theft loss. (It looks as though your client's mother may have one too. I know that casualty/theft losses are usually a joke on a tax return, but that's what this is.)

Also, it's not clear from the facts presented that Vanguard is responsible for making the stolen IRA good. It may be so, but it's not a given.

[kcjenkins]

But it almost certainly will be Vanguard's problem, not the client's. Because unless the OWNER of the IRA authorized the transfer, their responsibility is to protect the client's funds. They can NOT just transfer funds because someone else tells them to. They needed to have THE CLIENT'S SIGNATURE on the request, not just a phone call from someone, no matter who that person claimed to be. They have a fiduciary responsibility, and unless the thief also forged her signature, Vanguard is liable for putting the money back, and correcting the 1099-R.

[Slappy Tax]

As they used to say on Perry Mason shows, you're assuming facts not in evidence. Vanguard is a pretty sophisticated company, and I'm quite sure it would not have moved $100K+ without adhering to contractual and standard safeguards to protect the account holder's funds. The point is, based on the original post, I don't know the facts and didn't pretend to. I made that clear. Somehow you read the same post and decided that an obviously knuckleheaded client did nothing to cause or contribute to Vanguard's release of those funds. You're reading alot into the original post to come to that conclusion.

For instance, we don't know whether the client provided the thief with a power-of-attorney which would have empowered her to perform such transactions. If a POA was issued, we don't know whether it was a General (i.e., blanket) POA, or a Special (i.e., specific) POA. If it was a Special POA, we don't know what authorizations it conferred. I've never known of a nationally recognized fund administrator such as Vanguard to release or transfer IRA funds without a written authorization. So we don't know whether the thief forged the client's signature, deceptively had the client sign a form (the original post made it clear that the client was asleep at the switch when it came to these things), or exactly what happened. I'm as sure as I can be based on the information so far that the money was not transferred based purely on just a phonecall. Then you have to consider whether the client provided the thief with data that would have enabled the thief to assume the client's identity vis-a-vis Vanguard, such as account numbers, PINs, and personal data that Vanguard could reasonably use to "confirm" the identity of the account holder. If the client provided that information, or failed to protect it adequately, she cannot then transfer her negligence to another party. If you're unsure of this rule, go re-read the account information from your bank regarding the protection of PINs and passwords. For instance, if someone steals your ATM card and gets your PIN because you keep it written in your wallet and cleans out your bank account, the bank won't refund your money.

Hopefully, it will come down to this: Vanguard relied on a written authorization in which the thief forged the client's signature, and Vanguard failed to exercise reasonable judgment in discerning whether that signature was forged. If so, the client might stand a chance against Vanguard.

On this point, KCJ and I differ. KCJ writes, "Unless the thief also forged [the client's] signature, Vanguard is liable for putting the money back." I conclude the opposite. I believe that the client's only chance with Vanguard would be if the client's signature had been forged and Vanguard failed to compare the signatures or was sloppy in its comparison.

But there is too much unknown to leap to the conclusion that Vanguard is on the hook here. That might turn out to be true, but based on the incomplete facts available so far, I'm betting that Vanguard will say, too bad, so sad.

Of course, everyone's sympathy will naturally lie with the victim, but sympathy's not worth much, if anything, when it comes down to the legalities.

[kcjenkins]

Actually, you and I don't disagree on that, Slappy. What I should have made clear was "Unless the thief also forged [the client's] signature and did a real good job of the forgery....." I agree with you, on the "failed to compare the signatures or was sloppy in its comparison" point.

[Slappy Tax]

Thanks for the clarification, KC.

One more thing I thought of after posting is that the client should consider informing the IRS of the thief's loot. I'm betting the crook isn't going to file a tax return or won't claim the stolen money if she does. As we all know, stolen or illegal income is still taxable (ask Al Capone). The client might be able to turn the IRS onto the crook to see whether the crook reports the stolen funds (what would you guess she will do?), plus the client might be eligible for a reward from the IRS once all the dust settles. Just a thought.

PS: The most cogent thing written in this whole thread is Joan's subtitle to her post: "ALWAYS read your statements"