Ask Liz Weston

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Taxes

Q&A: How to protect QCD checks from mail theft

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Dear Liz: In response to a reader whose check to the IRS was stolen from the post office, you (again) warned readers that mail theft and check fraud have soared and that electronic payments are now the safest way to send money.

I’ve been making my charitable donations using qualified charitable distributions from my IRA. My brokerage does this by mailing me a check in the amount I request, payable to my charity. I then mail the check to the charity.

It seems risky, but it is the only way I can use the QCD option to donate untaxed dollars. Is there a safer way to do this?

Answer: You’ve touched on an unfortunate reality. People are being warned not to mail checks because of rampant theft, yet brokerages still rely on sending physical checks for certain transactions such as qualified charitable distributions or 401(k) rollovers.

Since you can’t eliminate the risk with electronic transfers, see if you can eliminate at least one trip through the mail. Ask if the brokerage will mail the check directly to the charity, rather than sending it to you first. If that’s not an option and the charity is local, you could hand-deliver the check.

Another possibility is to find out if your IRA offers check-writing privileges. If it does, you could write the check directly to the charity. Use indelible black gel ink, which is harder to remove than regular ballpoint ink, and consider sending the check by certified mail so you can track its delivery.

You also should closely monitor your account to make sure the check gets cashed. IRA checkwriting agreements can require customers to report missing or fraudulent checks promptly. Waiting too long could jeopardize your ability to recover a loss.

As you know, qualified charitable distributions allow people 70½ and older to transfer money directly from an IRA to an eligible charity without including the distribution in taxable income. To count for that tax year, though, an IRA check must clear by year-end. Make sure the check is sent before December to leave plenty of time for the charity to receive and deposit it.

Q&A: Delayed tax refund? Contact your lawmaker

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Dear Liz: A reader requested advice regarding a delayed tax refund. I had a similar problem a few years ago. The IRS owed me a substantial refund. I tried calling the IRS but couldn’t reach a person.

The automated system insisted my refund had been sent. I wound up calling my congressman’s office. They assigned a field representative to investigate. She was able to contact someone at the IRS who opened an investigation. She periodically followed up and kept me advised by email of her efforts. It took a few months but thanks to her work (and persistence), the IRS finally sent me my refund.

Answer: Thanks for the great tip! Elected representatives’ constituent services teams often can help people resolve issues with government agencies.

Q&A: Can Roth conversions help reduce the widow’s penalty?

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Dear Liz: The letter writer who asked about Roth conversions should also consider that they or their spouse will eventually be a widow(er) and will be subject to the income tax “widow’s penalty.”

Roth conversions now protect the survivor against some of that tax bite.

Answer: The widow’s penalty refers to the higher financial burden many survivors face after losing a spouse as they change from “married filing jointly” status to “single” status.

While their incomes may drop, their taxes and other costs may rise.

Having at least some money in a tax-free account can help with this as well as a number of other situations in retirement, which is why it’s important to fund a Roth account during your working years if you can.

The main downside to Roth contributions is that you don’t get an upfront tax break for making them.

Conversions, though, are more complicated.

They trigger a tax bill and can have ripple effects, such as reducing eligibility for tax credits, financial aid or health insurance subsidies.

Late-in-life conversions can increase Medicare premiums and cause more of your Social Security checks to be taxable. That’s why conversions should only be considered after careful consultation with tax pros.

Q&A: What to do when you missed years of inherited IRA distributions

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Dear Liz: I inherited my father’s IRA through a trust in 2010. Unbeknownst to me at the time, I’ve now found out I should have taken that money out over the following years, but I didn’t.

I turned 73 in May of this year, and I’d like advice on what I should do with that account.

Answer: Get thee to a tax pro. You’ve got some distributions to make, taxes to pay and penalties to mitigate.

Today’s rules for inherited IRAs require most non-spouse beneficiaries to empty the accounts within 10 years, thanks to the SECURE Act of 2019.

Before that, most beneficiaries could spread required minimum distributions over their own lifetimes.

Depending on the type of trust, you might have been required to take RMDs at the same pace your father was taking them. But either way, distributions were supposed to be made.

You (or better yet, your tax pro) will need to reconstruct the distributions that should have been taken since 2010, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Those distributions should be made as soon as possible, and then you (or better yet, your tax pro) can ask for relief from the possible 25% excise tax penalty that would otherwise be owed on the distributions you missed.

Your tax pro will need a copy of the trust, your dad’s date of death and the IRA’s Dec. 31 balances for every year since then.

Q&A: What to do when a stolen IRS check is altered and cashed

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Dear Liz: My mail with a check to the IRS was stolen from inside the post office (I dropped it into the internal wall slot). The envelope was pre-addressed to the IRS P.O. box. The payee on the check was altered. The memo section text was removed, and parts of the upper-left section of the check were removed or altered, including a misspelling.

I discovered the mail theft after the bank’s 90-day reporting period but within the UCC (Uniform Commercial Code) filing period. I opened a police report, filed a notarized Affidavit of Check/Account Fraud with my bank, closed that checking account, and filed a complaint with the Consumer Financial Protection Bureau.

The amount lost is in the mid-five figures. Is there anything more I can do to get my money back? If not, any way to deduct the loss? I am crying all the time and losing sleep. I am a senior, if that matters.

Answer: Francoise Cleveland, AARP’s government affairs director, says you’ve already taken many of the recommended steps to deal with check fraud, including filing a police report, closing the account and working with your bank.

In addition, Cleveland recommends reporting the theft to the Federal Trade Commission and the U.S. Postal Inspection Service, which investigates mail theft and related check fraud. (You can file a mail theft complaint online at the USPIS.) Cleveland also encourages you to contact the AARP Fraud Watch Network for information, support and further guidance.

Whether you ultimately get your money back depends on several factors, including the specific facts of your case and state and federal law. Banks work through these determinations behind the scenes, and it can take time, Cleveland says.

That said, you may want to hire an attorney familiar with banking or consumer law. Unfortunately, it can be easy for a bank to ignore a customer, but it’s a lot harder to ignore a law firm. At a minimum, make sure your bank has copies of the police report and your USPIS filing.

As far as deducting the loss, the news isn’t good. Personal theft losses generally are deductible only in limited circumstances, such as when the theft is attributable to a federally declared disaster, Cleveland says. Victims of investment fraud may deduct their theft losses, but victims of other types of fraud (such as romance scams and government impersonators — ”I’m from the IRS and you’re about to be arrested”) aren’t eligible.

It gets worse. People have had money stolen from a 401(k) or another account where withdrawals are taxable. So not only are the victims out the money and unable to deduct their losses, but they typically still owe taxes on the withdrawal. Cleveland says AARP supports a bipartisan bill called the Tax Relief for Victims of Crimes, Scams, and Disasters Act that would provide some help to victims of fraud and unexpected disasters even if they are unable to recover their stolen funds.

You should also be aware that scammers may target you again, promising they can help you recover your stolen money. The Federal Trade Commission warns you to be wary of anyone trying to charge you an upfront fee to get your money back.

And for everyone else who’s reading this: Please take heed. Mail theft and check fraud have soared. Switch to electronic payments now before you become yet another victim.

Q&A: Are credit card surcharges a tax windfall for businesses?

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Dear Liz: Regarding the fees charged to use credit cards. Aren’t the fees charged by the credit card companies considered deductible expenses on the businesses’ taxes? It seems that if the customer pays the surcharge then the business claims a deduction on its taxes, the business is getting a big benefit. It’s nothing but a scam. If I’m paying the fee, then the business shouldn’t be able to deduct it.

Answer: You don’t have the accounting quite right. The surcharge you pay to use a credit card is generally considered income to the business. The deduction isn’t a windfall but prevents the business from being taxed on money it collected and then paid to the credit-card processor.

The surcharge allows the business to pass some or all of its processing costs onto the customers that cause it to incur the costs, rather than simply absorbing the expense. Of course, some customers will take their business elsewhere because of the surcharge, so the ultimate effect on profits is in question.