Tax Tips - Attention Madoff Victims - Two IRS Solutions to Recoup Your Losses

Did you or someone you know get scammed bycreates or increases a net operating loss in the
the famous Bernie Madoff, current King of theyear the loss is deducted, the investor may carry
Ponzi schemes? If so, you might have someback that loss for up to three years, and carry
recourse for your losses via your tax returnlosses forward for up to 20 years. Great. What
filings. If you're embarrassed by what happened,should you do next; do you amend your past
you might be tempted to try to handle filing forthree years' tax returns to capture more of the
these deductions yourself. But, do you knowtheft loss deduction?
enough about filing and amending tax returns toSolution #2: The 'Capital Loss' Claim
answer questions like these:What if you invested in Madoff indirectly? You
- Do you go back and amend all your prior-yearknow - those 'feeder' mutual funds that Bernie
tax returns, reversing all the income you claimedused to scam thousands more from folks like
from the fraudulent paper statements youyou. Those losses do not qualify for the theft loss
received?deduction. According to the IRS, you have
- What if some of those prior years are "closed"incurred a capital loss. Capital losses may only be
to you now, because they are past the statuteapplied against all capital gains. In addition, you may
of limitations, which does not allow you to file andeduct up to $3,000 against other income. Losses
amended tax return?beyond your capital gains and the $3,000 limit
- Once you know the amounts you lost, do youhave to be carried forward into future years. Do
know how to calculate the losses you can claim?you have the experience and technology to
- Do you know the difference between an IRSproperly calculate and carry forward this kind of
theft loss and an IRS capital loss?information? Do you really want to have to
Solution #1: The 'Theft Loss' deductionmanage this all yourself?
Well, the IRS felt your pain this year and decidedNow that you know the IRS's two solutions for
to help you out. Really! The IRS published Revhow you might recoup some of your losses in the
Proc 2009-20, issuing safe harbor guidance onBernie Madoff /Ponzi scheme, I encourage you or
how to treat "Ponzi" schemes like Madoff's. Underthe victim you know to work with an
this ruling, such schemes are entitled to a theftexperienced Tax Preparer or Certified Public
loss deduction under IRS Code Sec 165. InAccountant (CPA) to get all the tax breaks you
addition, IRS Rev Rul 2009-9 identifies that adeserve.
theft loss is deductible in the year it is discovered.It's always easier to prevent mistakes than it is
Does this mean you don't have to go back andto correct them after the fact. Working with an
amend your prior returns? Well, yes and no.experienced Tax Preparer or CPA can help
Before you know the answer, you have toprotect you from these kinds of errors. The
identify the amount of your theft loss. Accordingbetter lesson here is to NEVER deal with anyone
to IRS Code Sec 165, the amount of the theftwho asks you to write an investment check
loss deduction includes the amount you investeddirectly to them or a company they control. But
directly with Madoff, less any amounts withdrawnyou already knew that didn't you?
including reimbursements. More importantly, theThese kinds of conversations are all part of our
deductible amount also includes any fictitiousoverall services to our clients at NCH Wealth
income that was reported to the investor in theAdvisors. Please contact our office if you have
years prior to the discovery of the theft thatany questions: 714-459-7020. We are happy to
was included in the investor's gross income, andhelp provide the direction you need.
subsequently reinvested in the scheme. Well, thatPlease feel free to pass this along to anyone you
sounds simple enough until you discover this: tothink might benefit from this information. We
the extent an investor's theft loss deductionappreciate all referrals.