It’s tax time, which makes it a great time to discuss IRS fraud loss deductions. Each week we report on new Ponzi schemes and a variety of other frauds. Everyday the SEC generates a press release about the latest fraud they have prosecuted, and yearly thousands more frauds are discovered but never make the press. What happens to the many victims that never recover their losses?
Victims of Ponzi schemes, securities fraud and other frauds may be eligible to recoup some of their losses from Uncle Sam!
Section 165 of the IRS code allows people to deduct certain losses from their taxes. Most losses are considered investment losses and subject to strict limits. True fraud losses, however, receive great tax treatment IF you know how to qualify.
What is so special about the tax loss treatment? The fraud provisions allow taxpayers to convert their investment losses into ordinary losses. This allows one to offset his or her losses against current income. The rules even allow you to amend old returns and claim refunds for taxes previously paid.
In the wake of the Madoff scandal, the IRS provided a fairly simple “safe harbor” provision that streamlines the application process IF the investment was truly fraudulent and IF one purchased from the fraudster directly and IF the fraudster was charged criminally or a receiver appointed to seek his assets. That’s a lot of “ifs” and that, unfortunately, scares off many victims and their accountants.
Many accountants are also not familiar with the rules. Each year we find accountants that incorrectly treated fraud losses as investment losses.
Although the rules are complicated, knowledgeable CPA’s and tax attorneys can help you file for the deduction if the safe harbor rules apply. If the safe harbor provision does not apply, a lawyer is necessary. Most return preparers are not qualified to document that the loss is uncollectible.
Fortunately, often even the accounting and legal fees can be folded into the deduction.
If you are the victim of a true fraud, act quickly. The time for filing a fraud loss deduction is limited.
The Wisconsin tax lawyers at Mahany & Ertl help fraud victims across the United States. From our offices in Milwaukee, Wisconsin; Detroit (Birmingham), Michigan; and Portland, Maine, we have helped individuals and businesses with tax problems from Maine to Florida.
Our tax attorneys can also assist with fraud recovery, tax court litigation, welfare benefits plans (419 plans), audit defense, IRS collections and criminal tax defense. Call Brian Mahany for more information at (414) 704-6731.