Getting ripped off by a financial scammer can be a devastating and humiliating experience.
But at least you won’t get fleeced twice at tax time.
New IRS rules issued in the wake of the multi-billion dollar Bernie Madoff investment scam have attempted to make it simpler and easier for swindled taxpayers to deduct their theft losses.
The process of determining the amount of losses and pinpointing the tax year in which they occurred is still complicated. But IRS rulings 2009-9 and 2009-20 are intended to help taxpayers calculate their tax-deductible losses and balance them against the prospect of recovery. The rulings also outline the safe-harbor rules for estimating and reporting losses that taxpayers can follow to avoid any future tax repercussions.
In essence, the rulings say that losses to investment fraud are not capped by the usual $3,000 limitation on annual capital loss deductions. Deductible losses can include all moneys invested along with any “gains” from the scheme that were taxed in prior years and reinvested in the fraud. And the losses are deducted in the year in which the scam is discovered, less any amounts that are deemed likely to be recovered.
So it’s not the same as getting your money back. But you won’t face insult piled on injury by paying taxes on the money that was drained from you by a thief.
- Internal Revenue Service: Help for Victims of Ponzi Investment Schemes
- Internal Revenue Service: Senate Finance Committee Testimony on Ponzi Schemes and Off-Shore Tax Evasion Legislation