Ponzi Scheme Victims Get a Tax Break

The IRS announced unprecedented tax relief for victims of Ponzi schemes, syaing many of those affected could deduct up to 95% of their losses, immediately. The move represents a significant relaxation of longstanding limits on tax relief for victims of investment scams.

In broad terms, the IRS said Ponzi scheme victim who aren’t suing to recover their losses can generally deduct up to 95% of their qualified losses – minus any potential recoveries from insurance or the Securities Investor Production Corporation (or SIPC) – in the year the fraud is discovered. Those pursuing third party recoveries can deduct 70% of relevant investments, after potential recoveries.

The SIPC, is an organization designed to help investors at failed brokerage firms.

The IRS said victims wouldn’t be subject to limits that apply to personal casualty or theft losses and could carry back net operating losses five years to offset taxes paid, or forward 20 years. Under prior rules, many investors had to subtract $100 and 10% of their adjusted gross income from their loss deductions, and could carry back losses only three years, or forward 20 years.

In another change, the IRS said investors can include their principal, as well as any so-called phantom income they have received over the years, in their theft-loss deductions. Previously, the IRS allowed some Ponzi scheme victims to deduct only their principal as a theft loss, not phantom income.

However these changes still leave open some questions like what happens if you participated in a Ponzi scheme through a IRA account or indirectly through feeder funds.

At the end of the day with all these changes and Congress trying to find ways to help victims who were swindled by Bernard Madhoff, its best to consult any attorney to figure out where you stand and how all the changes in the law can affect you.

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