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The link below is to an interesting, to me, Sixth Circuit Court of Appeals tax case that was published March 19, 2025 titled
| Hubbard v. Comm’r of Internal Revenue |
https://www.opn.ca6.uscourts.gov/opinions.pdf/25a0064p-06.pdf
I was not previously aware that there are two types of criminal forfeitures and the impact, at least so far, determined the taxability of a IRA distribution after forfeiture when the forfeiture order identifies the “specific property” (the IRA among other things) that the defendant must relinquish. Apparently, the government becomes the owner of this property at the time of a conviction per this Court of Appeals and Hubbard did not have taxable income event when the IRS withdrew the $400K+ from his former IRA.
In the non criminal arena this case comments that if you have been swindled out of an IRA by theft and then to add insult to injury you get a 1099-R saying you have taxable income from the IRA distribution you did not receive that there is case law you may reference when preparing your return and excluding that income and when/if you get correspondence from the IRS. See that case reference on page 9 of the link titled Balint v. Comm’r.
However, I do not believe it was economic thinking to bring this tax case after the district court had already ordered
Hubbard to serve decades in prison for illegally operating an illegal “pill mill”, but rather to send a message that doing so will mean you will lose everything.
If aware of the occurrence of such a scam I think there are proactive actions that a victim could take such as filing appropriate reports with law enforcement regarding the theft and documenting the same with the previous custodian of the the IRA. A formal communication to that custodian of that victim’s expectation that a 1099-R should not be issued to them with appropriate citation of legal prescient of why a 1099-R should not be issued could avoid a lot of tax headaches for the victim. I think preparing such communication notice to the custodian falls squarely in the role of the practice of law and having an attorney prepare the communication may be the strongest and most effective course of action.
When people receive 1099’s of any sort that are erroneous it may be most effective to report the erroneous 1099 on the victim’s return where the taxing authorities are expecting to find the income and then have a offsetting separate line item to eliminate the income and include adequate explanation in the return. Not reporting an erroneous 1099 will likely result in communication from the IRS year(s) later when the IRS computer system tries to match the 1099 reporting with what is on the 1040.
A common mismatch situation I have seen is when a business issues in error a 1099-NEC for the rental of real property when the appropriate reporting should have been on a 1099-MISC. In such a case adding a separate Schedule C with the error reported as income and a offsetting deduction to zero out the income with appropriate disclosure can be done. Yes, there is the ability to have the 1099 payor issue a corrected 1099 which formal route to go. I am uncertain if a corrected 1099 overcomes the original 1099 with errors especially when the 1099 error is discovered by the return preparer months after the original reporting was done. I have not prepared a 1040 with a income source from a erroneous 1099-R as best I can recall.
Years ago 1099 & W-2 filings by business were required to be distributed by January 31 as they are now but did not have to be filed with the IRS or SSA until a month latter. Some businesses would hold transmitting their 1099’s and W-2’s the IRS/SSA a short while to wait for payees to advise of any errors on the 1099/W-2 and would then update the third party reporting documents before sending them on to the IRS/SSA without having to jump through hoops a correction requires. Electronic filing of 1099’s and W-2’s by payors has mostly made waiting to file by payors a thing of the past.
Best, Bill
“However, I do not believe it was economic thinking to bring this tax case…”
I disagree. It was the criminal who brought the tax case (pro se, BTW) to the Tax Court and then the Appellate Court and it was good that he did as he avoided a $180k TC judgement which would surely have grown to the many millions by the time he got out of prison.
The appellate decision linked above is a very easy and quite amusing read, for those so inclined. 12 pages.
I also found the reading of the case an enjoyable read. When I was a young accountant outside of a busy tax season and working in a downtown office near both state and federal courthouses it was always informative to sit in on trials. Once in my capacity as a CPA I was offering expert testimony in a bankruptcy court as to the adequacy of records. The hearing was interrupted for another matter before the court. A woman was lead in before the judge in jail garb and handcuffs. Judge Bare asked the prisoner if she was ready to disclose the location of certain assets she had hidden. She did not and was sent back to jail. The event certainly made a lasting impression on me and I think all the other non attorneys who were in the courtroom.
My impression in reading the CA ruling on the Hubbard case was that he was never going to get out of jail but that may be a foolish assumption on my part.
This moving podcast (https://www.wbur.org/onpoint/2025/04/02/scam-judith-boivin-life-savings) indicates that, prior to the 2017 tax law changes, someone scammed out of an IRA could deduct their losses from income. Now the losses are considered taxable income, and I think you are saying, someone with a good lawyer could successfully contest the tax bill. But that presupposes they would have the knowledge and resources to do so.