Thousands of U.S. taxpayers have fallen victim to investment fraud schemes, often losing their entire life savings, and now the Internal Revenue Service (IRS) wants to assist taxpayers by articulating how to handle the complex issues facing these taxpayers when filing their taxes.
On March 17, 2009, the Commissioner of the IRS, Doug Shulman, testified before the Senate Finance Committee on Tax Issues that affect victims of ponzi schemes. In particular, the IRS issued two guidance items, a revenue ruling and a revenue procedure, to aid taxpayers who have fallen victim to investment schemes.
According to the IRS website, the IRS’s revenue ruling states that (1) “The investor is entitled to a theft loss, which is not a capital loss”; (2)” ‘Investment’ theft losses are not subject to limitations that are applicable to ‘personal’ casualty and theft losses,” meaning the loss, although an itemized dediction, is “not subject to the 10 percent of AGI reduction or the $100 reduction that applies to many casualty and theft loss deductions;” (3) “The theft loss is deductible in the year the fraud is discovered, except to the extent there is a claim with a reasonable prospect of recovery;” (4) “The amount of the theft loss includes the investor’s unrecovered investment including income as reported in past years;” and (5) “A theft loss deduction that creates a net operating loss for the taxpayer can be carried back and forward according to the time frames prescribed by law to generate a refund of taxes paid in other taxable years.”
The revenue procedure was issued by the IRS in an effort to provide victims of investment schemes a uniform approach to dealing with investment losses due to fraudulent schemes.The IRS’s revenue procedure, outlined on the IRS website, allows taxpayers to assume two things when reporting their losses. First, the IRS will deem the loss to be resulting from theft if (1) the fraudster was charged under federal or state law for the commission of fraud, embezzlement or a similar crime that would be defined as theft; (2) the fraudster was the subject of a federal or state criminal complaint which alleges that they have committed such a crime; and (3) either there was some evidence of an admission of guilt asserted by the fraudster or a trustee was appointed to freeze the assets associated with the scheme. Second, taxpayers will be generally allowed to “deduct in the year of discovery 95 percent of their net investment less the amount of any actual recovery in the year of discovery and the amount of any recovery expected from private or other insurance.” Should the victim of the scheme sue someone other than the fraudster, however, they would compute the deduction by substituting 75 percent for the 95 percent in the above formula.
If you have fallen victim to an investment scheme, as you can see, there may be tax implications with regard to the losses sustained. A tax professional should be consulted in an effort to best manage the economic fallout from such losses. Additionally, it is imperative that you consult an attorney to determine what, if any, legal action may be taken to assist in the potential recovery of financial losses. Remember there may be a time limitation on when you may file an action so do not delay.
Jason Doss is the owner of The Doss Firm, LLC, an Atlanta-based law firm devoted to representing consumers across the country in a variety of areas including investment disputes and consumer class action litigation. Mr. Doss earned his J.D. from Florida State University in 2002 and his B.A. from the University of Florida in 1997.