My client was fraudulently induced to withdraw $130,000 from her IRA in 2017 by a broker who stole her money. She endorsed the paper check over to a phony self directed IRA custodian. When I told her she was a victim of a Ponzi scheme she hired a law firm. The broker and his cronies are part of a $103,000,000 SEC investigation. The broker was barred and the company that employed him gave her a $65,000 settlement in mediation for failure to supervise him. After the lawyers take, she was able to make a restorative payment of $37,000 to her IRA. I reported the $130,000 as an indirect IRA rollover since the 1099 said the taxable amount on the withdrawal was undetermined. Now IRS wants to tax her on the $130,000 per the letter she received today. I can't find a revenue ruling for her. She doesn't want to take a tax loss which all the Rev Ruling apply. I know she can avoid the tax on the $37,000 which was restorative payment and the amount the lawyer took. But what about the other $65,000 which she has little chance to recover?