Wife's 'Lost' IRA Account

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Wife's 'Lost' IRA Account

Postby Milano » Sat Jul 27, 2013 2:45 am

In 2006 I opened a IRA account to my wife's name , she deposited the maximum allowable via a check for $ 3,500, she wrote "IRA" on the check. This March we transferred my IRA and hers to Vanguard, in the process we discovered that her IRA was not transferred. We got a copy of her check and found that the check was deposited into my taxable account. We have neglected the account since the one deposit made in 2006. ML did open an IRA account to her name and sent us documents describing that.

After several emails and letters Ml's position changed from stating that the account was not founded to saying that since I made the maximum contribution to my IRA account in 2006 her account was not eligible to be funded.

In researching this, my opinion is that both partners can contribute each the maximum allowable.

We consider the money lost, and contemplating filing with FINRA.
Last edited by Milano on Sun Jul 28, 2013 2:32 pm, edited 1 time in total.
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Re: Wife's IRA Account

Postby Sidney » Sat Jul 27, 2013 8:37 am

I'm confused. If the check was deposited to your taxable account, the money isn't lost. It means that they didn't route the funds to the account you wanted and (perhaps) your 2006 Tax Return is incorrect. Did you take a deduction for what you thought was the IRA deposit by your wife?
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Re: Wife's IRA Account

Postby dickenjb » Sat Jul 27, 2013 8:38 am

Sounds like the time to address this with "ML" (Merrill Lynch?) would have been when you got the IRA statement showing a zero balance in 2006.

The money is not lost, it went to the wrong account.

Usually banks and brokers indicate by when you need to correct errors on your statements - 60 days usually. Not 7 years.
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Re: Wife's IRA Account

Postby Milano » Sat Jul 27, 2013 12:24 pm

dickenjb wrote:Sounds like the time to address this with "ML" (Merrill Lynch?) would have been when you got the IRA statement showing a zero balance in 2006.

The money is not lost, it went to the wrong account.

Usually banks and brokers indicate by when you need to correct errors on your statements - 60 days usually. Not 7 years.


Yes ML is Merrill Lynch, we neglected the account, and we are seeking advice to remedy this. Our point is that we both were allowed the maximum contributions, in a letter sent by ML recently they claim that they had to cash my wife's check into my taxable account because i had maxed my contribution, as if they were unaware that a new IRA account was opened in my wife's name. There is documentation on on the non funded wife's IRA account.

Invested with ML since 1984, as I have stated to my advisor I trust them as much as a used car salesperson.
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Re: Wife's IRA Account

Postby Sidney » Sat Jul 27, 2013 12:42 pm

First, I doubt you will get ML to do anything retroactive at this point. I can't see how they could recharacterize some of your taxable money to an IRA as if it had been put in an IRA in 2006.

Second, in effect, right now you have taken the deduction ("deferred" the recognition of that income) and have no easy mechanism to pay the tax at withdrawal since there is no IRA withdrawal. Back to my first post, I think your real issue is the incorrect 2006 Tax Return. Since there appears not to have been any intention of fraud, the statute of limitations on an audit has likely passed. At this point, you have the advantage of the deduction and, if you do nothing, you will never pay tax on that deferred income. There may be a mechanism to correct this with the IRS. It would probably involve a voluntary payment of the tax on that income that was not recognized in 2006. Someone on the board with more IRA/IRS knowledge than me might comment.
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Re: Wife's IRA Account

Postby DiscoBunny1979 » Sat Jul 27, 2013 2:17 pm

Sidney wrote: Since there appears not to have been any intention of fraud, the statute of limitations on an audit has likely passed. At this point, you have the advantage of the deduction and, if you do nothing, you will never pay tax on that deferred income. There may be a mechanism to correct this with the IRS. It would probably involve a voluntary payment of the tax on that income that was not recognized in 2006. Someone on the board with more IRA/IRS knowledge than me might comment.

-----------------

The problem is doing nothing with the knowledge that there was a tax deduction without the contribution being made. While the OP can use an argument that they did not know that the deposit wasn't made into the IRA account, sometimes, ignorance is no excuse. The law is the law. A deposit has to be made appropriately to claim a deduction. Now that the OP knows this, if the OP does nothing, then it can be considered fraud because there was a tax deduction taken when the OP should have known there was no correct IRA deposit made and there are cancelled checks and a paper trail to suggest that the OP knew that the deposit was made in the taxable account even though IRA was written on the check. It's up to the account owner to make sure $$ are deposited according to preferences and therefore by not having the deposit, regardless of who made the mistake, the tax deduction should not have been taken and there could be taxes owed based on 2006 and interest each year thereafter if the IRS considers it to be fraud. Since Fraud has no statute of limitations, it' best the OP clear it up as a 'mistake' now before the IRS determines there is a problem by examining the Basis on such account to the deductions taken.
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Re: Wife's IRA Account

Postby Milano » Sat Jul 27, 2013 9:21 pm

Thanks for the responses.

What needs clarification is that both my wife and I can contribute **each** the maximum IRA contributions (3,500 in 2006) in each of our IRA accounts.

The last letter that ML sent us a few weeks ago states that my wife's money was put in my taxable account because I maxed out my contribution in my IRA, ML is acting as if my wife's account was not opened, we have the opening documents and account number, ML has written in this matter that my wife's account was not funded therefore agreeing on its existence.

I am pursuing this in an effort to learn, post 29 years of ML.
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Re: Wife's IRA Account

Postby Default User BR » Sun Jul 28, 2013 1:57 pm

DiscoBunny1979 wrote:A deposit has to be made appropriately to claim a deduction. Now that the OP knows this, if the OP does nothing, then it can be considered fraud

This is from an IRS manual (emphasis mine):
Fraud is an actual, intentional wrongdoing. While bad faith or evil intent need not be shown, it must be shown that the taxpayer had the specific purpose to evade a tax believed to be owed in mind when performing an act (or making an omission).

I think it's pretty clear that it has to be an intentional not a mistaken action at the time the return was filed. Knowledge years later won't convert non-fraud into fraud. The IRS should have caught this in the first place. They dropped the ball by not matching up IRA deductions against paperwork filed by custodians.

The three-year standard look-back period is past. I doubt the IRS could get the courts to agree that this is a case of fraud to reopen that return. The OP should shrug and go on with his life. The IRA doesn't exist and never will now.


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Re: Wife's 'Lost' IRA Account

Postby Milano » Sun Jul 28, 2013 2:51 pm

This forum is great, thanks for the responses.

My concerns are with ML not the IRS. ML first denied that the wife's IRA account was funded, we got a copy of the check, ML had written and scratched out numbers of two different accounts on it, the check is signed by my wife, from her account and she wrote 'IRA' on it. A few days before we asked ML to open her own IRA account.

After letters denying the account funding, the account existence, ML claims that depositing the in my taxable account was due me depositing the maximum into my IRA, after some research my understanding is that we **both ** can deposit the maximum.

I am responding in writing to ML to complain about this error, I am not planning to refile with the IRS for 2006.
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Re: Wife's IRA Account

Postby BolderBoy » Sun Jul 28, 2013 4:50 pm

DiscoBunny1979 wrote:Since Fraud has no statute of limitations, it' best the OP clear it up as a 'mistake' now before the IRS determines there is a problem by examining the Basis on such account to the deductions taken.

A fraud allegation puts 100% of the burden of proving that on the IRS. Legally proving fraud has several components and isn't always easy (and OP's posting here makes the mental intent part of committing fraud difficult to prove.) Absent the IRS asserting that the 2006 claimed deduction without the actual monies being deposited was a criminal act, the statute of limitations has run on this issue. If the amount at issue is $3500 it is pretty small for the IRS to start a criminal investigation (which can cost the agency a LOT.)

I think OP needs to lick his wounds, count the contribution to the IRA as lost (but not the money) and move forward paying more attention to what he wants to see done.

(PS - I'm not a lawyer, but spent some time in the 1980s suing the IRS, pro se, and winning.)
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Re: Wife's IRA Account

Postby Milano » Sun Jul 28, 2013 5:48 pm

[@ bolderboy

I think OP needs to lick his wounds, count the contribution to the IRA as lost (but not the money) and move forward paying more attention to what he wants to see done.

(PS - I'm not a lawyer, but spent some time in the 1980s suing the IRS, pro se, and winning.)[/quote]

This is the realistic solution, I' am writing to ML just to prove them wrong .
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Re: Wife's IRA Account

Postby RobInCT » Sun Jul 28, 2013 6:12 pm

Milano wrote:I' am writing to ML just to prove them wrong .

Knock yourself out if it makes you happy, but I'd put chances at about 0 that ML ever admits they were wrong, even if you end up talking to someone who personally understands that there was a mix-up. It's 7 years down the road. I'm going to guess they couldn't fix this retroactively even if they wanted to--banks are subject to strict regulation and oversight, and retroactively rewriting contributions from years ago would probably send up a lot of internal compliance flags even if it was done to correct an actual error on the bank's part. So absent some ability to fix it, they best they can do was admit they made a mistake.

We do not live in a country where banks go around acknowledging making mistakes with client funds just to make customers happy.
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Re: Wife's 'Lost' IRA Account

Postby bsteiner » Sun Jul 28, 2013 6:43 pm

BolderBoy wrote:...A fraud allegation puts 100% of the burden of proving that on the IRS. Legally proving fraud has several components and isn't always easy (and OP's posting here makes the mental intent part of committing fraud difficult to prove.) Absent the IRS asserting that the 2006 claimed deduction without the actual monies being deposited was a criminal act, the statute of limitations has run on this issue. If the amount at issue is $3500 it is pretty small for the IRS to start a criminal investigation (which can cost the agency a LOT.)


There's also civil fraud. In the case of civil fraud, the burden is still on the IRS, but they don't have to prove it beyond a reasonable doubt (the criminal standard). If there's civil fraud, the statute of limitations remains open under Section 6501(c)(1), and there's a penalty under Section 6663 of 75% of the portion of the underpayment attributable to the fraud.

I've only had a very small number of cases where the IRS asserted a civil fraud penalty.
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Re: Wife's IRA Account

Postby manwithnoname » Sun Jul 28, 2013 7:29 pm

Milano wrote:
dickenjb wrote:Sounds like the time to address this with "ML" (Merrill Lynch?) would have been when you got the IRA statement showing a zero balance in 2006.

The money is not lost, it went to the wrong account.

Usually banks and brokers indicate by when you need to correct errors on your statements - 60 days usually. Not 7 years.


Yes ML is Merrill Lynch, we neglected the account, and we are seeking advice to remedy this. Our point is that we both were allowed the maximum contributions, in a letter sent by ML recently they claim that they had to cash my wife's check into my taxable account because i had maxed my contribution, as if they were unaware that a new IRA account was opened in my wife's name. There is documentation on on the non funded wife's IRA account.

Invested with ML since 1984, as I have stated to my advisor I trust them as much as a used car salesperson.


How did your wife identify to ML that the contribution was to be made to her IRA account, not yours? Fact that she opened an IRA account is not enough to identify that the contribution was to be made to her IRA. Spouses frequently make IRA contributions for the other's IRA at same brokerage/MF. I have made IRA contributions to my spouse's IRA at VG in addition to my own IRA at VG but I always enclose the check and VG deposit slip for her account in a separate envelope to prevent mistakes.

Did your spouse enclose a letter of instruction to ML telling them that the check was for her IRA account?

In any event she was negligent in not checking to confirm that the deposit was made to her account. I am assuming that she did not receive a 5498 form.
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Re: Wife's 'Lost' IRA Account

Postby 2stepsbehind » Sun Jul 28, 2013 7:44 pm

ML sucks. Just cut your losses and move your money.
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Re: Wife's 'Lost' IRA Account

Postby niceguy7376 » Sun Jul 28, 2013 10:12 pm

Hi Milano (OP),
You can go ahead and TRY to prove a pointn with ML but that does not resolve the main problem that the other bogleheads are highlighting.
Trying to secure a moral victory with ML will not help you in correcting past mistakes with IRS.

ML might have just sent a basic excuse letter or you did not provide proper instructions on check (just writing IRA on check is not enough to credit proper account if both of you have accounts). What you need to do is to correct your tax return and then move on.
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Re: Wife's 'Lost' IRA Account

Postby Default User BR » Mon Jul 29, 2013 2:40 am

bsteiner wrote:There's also civil fraud. In the case of civil fraud, the burden is still on the IRS, but they don't have to prove it beyond a reasonable doubt (the criminal standard).

The correspondence with ML trying to get the IRA established after the fact is probably pretty solid evidence that no fraud was intended.


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Re: Wife's 'Lost' IRA Account

Postby IPer » Mon Jul 29, 2013 7:57 am

Milano wrote:In 2006 I opened a IRA account to my wife's name , she deposited the maximum allowable via a check for $ 3,500, she wrote "IRA" on the check. This March we transferred my IRA and hers to Vanguard, in the process we discovered that her IRA was not transferred. We got a copy of her check and found that the check was deposited into my taxable account. We have neglected the account since the one deposit made in 2006. ML did open an IRA account to her name and sent us documents describing that.

After several emails and letters Ml's position changed from stating that the account was not founded to saying that since I made the maximum contribution to my IRA account in 2006 her account was not eligible to be funded.

In researching this, my opinion is that both partners can contribute each the maximum allowable.

We consider the money lost, and contemplating filing with FINRA.


I understand the question about the potential tax and refiling issue which shouldn't be great if it exists, in my experience the IRS would have notified you by now if they cared. What I don't understand is did this money get deposited into your account or not? And if it did why are you saying that you consider it lost? If it did and it is on your statement then that money is yours. If it is and the money is NOT on your statement then you need to get ML to cut you a check!
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Re: Wife's 'Lost' IRA Account

Postby pkcrafter » Mon Jul 29, 2013 8:08 pm

I think manwithnoname is in the right area with what went wrong. Suppose you just opened a new IRA and then your wife sends a check that has IRA written it. ML might have assumed it was a second contribution to the existing IRA, so they diverted the money to a taxable account because YOU had maxed your contribution to the limit. In other words, writing IRA on a check with no other instructions is not sufficient and not clear enough. ML's explanation seems to support this scenario.

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Re: Wife's 'Lost' IRA Account

Postby Spirit Rider » Tue Jul 30, 2013 10:45 am

Most IRA custodians have deposit slips to use when making deposits by mail. Did ML have such slips. If so, simply writing "IRA" on a check was not following proper procedures. One piece of additional information: "Was this check from an individual account or a joint account"?

Regardless, I just don't see how ML has any responsibility here and I am no fan of ML. I think you need to listen to everyone else and let it go and just move on. Consider this a lesson learned. I have seen several similar cases in the last few months here and on other financial forums. The accounts (bank, brokerage, or retirement) were not credited and only found out years later. In all cases the consumer was out of luck because of the years that had transpired. This is as it should be.

Regardless if the financial institution has any fault (in this case it doesn't seem so), the individual has a responsibility for monitoring the activity (especially when we are talking about thousands of dollars). Before there was on-line access, that meant reviewing monthly statements (at least in any month with transaction(s). For the last decade you have been able to verify that the transaction occurred within days on-line. I made a transfer to Fidelity yesterday and verified this morning it had arrived. I do that with any transactions.
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Re: Wife's 'Lost' IRA Account

Postby bsteiner » Tue Jul 30, 2013 11:28 am

Default User BR wrote:
bsteiner wrote:There's also civil fraud. In the case of civil fraud, the burden is still on the IRS, but they don't have to prove it beyond a reasonable doubt (the criminal standard).

The correspondence with ML trying to get the IRA established after the fact is probably pretty solid evidence that no fraud was intended.


I wasn't suggesting that this might be an appropriate case for the IRS to assert a fraud penalty. I was merely pointing out that there exists a 75% civil fraud penalty, in which the IRS has the burden of proof, but since it's not a criminal penalty, the burden of proof is less than the criminal standard of proof beyond a reasonable doubt.

I've only been involved in three civil fraud penalty cases in over 35 years. I was only slightly involved in the first one (which was many years ago, and involved the client of someone more senior), and I don't know how it was resolved. The other two were settled with the IRS Appeals Office (which has authority to settle cases based on the hazards of litigation), with the taxpayer paying a penalty greater than zero but less than the statutory penalty if the IRS has prevailed.

There's also a negligence penalty, which is 20%, and in which the taxpayer generally has the burden of proof. That's subject to the statute of limitations, which is generally 3 years.

Again, I'm merely pointing out the existence of the negligence penalty. I'm not suggesting that the IRS would have asserted it if the return had been audited before the statute of limitations ran out.
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Re: Wife's 'Lost' IRA Account

Postby Sidney » Tue Jul 30, 2013 11:30 am

Wouldn't fraud require intent?
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Re: Wife's 'Lost' IRA Account

Postby archbish99 » Tue Jul 30, 2013 11:40 am

The situation seems pretty clear:
  • ML "messed up" by not reading your mind. "IRA" does not identify a particular account. They guessed at the wrong IRA, saw that it was ineligible for contributions, and put the check in your taxable account. Yes, in an ideal world, they would have put it in the other IRA that was eligible for contributions, but you can't expect them to read your mind. Result: Your wife didn't make an IRA contribution in 2006.
  • Had you caught this in 2006, they could easily have corrected it by making an IRA contribution from your taxable account. You didn't. It's now past April 15, 2007, so the issue can no longer be corrected in this manner. Your wife has lost the ability to contribute to an IRA for 2006.
  • You filed a tax return with incorrect information. This was negligence rather than fraud, however, so the IRS can't come after you. Nor can you amend the return for correctness, since the period for amended returns has also passed. Error in your favor, it wasn't caught, nothing will ever come of it.
Frankly, take the tax benefit as moral recompense for not having gotten to put money in the IRA, write the account number on your check next time, and move on. Whining and making life difficult for ML staff who probably weren't even in college yet when the incident happened helps nothing.
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