Taxation & Estate Planning

Recovering from Fraud

By Darrin Mish

If you have been cheated financially, the last thing you need is to have to pay hefty taxes on your income.  Remember the Ponzi scheme ran by Bernard Madoff?  If you ever become a victim of such a fraudulent scheme, the IRS has implemented two guidelines that will sound like music to your ears.  They are the Revenue Ruling 2009-9 and Revenue Procedure 2009-20 guidelines.

Under these new rulings, the losses you incur under any fraudulent scheme after January 1, 2008 can be declared as a "theft loss".  Such a loss can be carried back five years instead of two.  This means that the amount of losses can be used to offset up to five years' worth of taxes, not just up to two.  This is vital because the reality is that major losses like those suffered by the Ponzi victims would have easily wiped out five years of their earnings.

The IRS has given you up to one year from the time you file your 2008 taxes to make your carry back claims.  However, there are some technical requirements to fulfill.  For example, if you wish to claim a theft loss for five years, you need to elect to do so.  Without a properly-made election, the IRS will reject your application.

Another standard requirement is the submission to the IRS of detailed documentation pertaining to the fraudulent scheme that you fell victim to.  The key factor to be determined by submitting all these documents is the exact time when the loss was suffered.  If the loss was suffered by you before January 1, 2008, then the new rulings do not apply.  Pre-2008 guidelines stipulate that you have to wait till the litigation is completed, which could last years.

If you are a family member of a fraud victim who has to pay estate tax, you can claim a refund of estate taxes if you file an amended estate form.  However, the IRS has not issued guidelines for estates involved in Ponzi schemes after January 1, 2008.  This is due to certain factors in the schemes themselves.  For example, if you invested in certain fraudulent securities or a Ponzi scheme, you may have been credited with money from another investor who joined the scheme after you did.  Under such circumstances, you may be required to give up a part of the money in a legal process called disgorgement.

If you lost money in a Ponzi scheme through a feeder fund, your position is also uncertain.  Such tax issues have not been resolved yet by the IRS so the only option is to be subjected to the 'default' pre-2008 IRS rules.

Darrin T. Mish is a veteran, nationally recognized tax attorney who has focused on providing IRS help to taxpayers for almost two decades. He regularly travels the country training other attorneys, CPAs and enrolled agents on how to handle their toughest cases with the IRS. He is highly ranked among the top attorneys in the country, with an AV rating from Martindale-Hubbell and a perfect 10 on Avvo.com. Martindale-Hubbell has also honored him with a listing in their Bar Register of Preeminent Lawyers. He is a member of the American Society of IRS Problem Solvers and the Tax Freedom Institute. With clients on every continent but Antarctica, he has what it takes to solve your IRS problems no matter where you live in the world. If you would like more information about his practice and how he can help you, please call his office at (813) 229-7100 or toll free at 1-888-GET-MISH.

Full post as published by IRS Problem Solver Blog on September 16, 2009 (boomark / email).