IRS Making Life Easier For Investment Fraud Victims
Responding to all the high-profile Ponzi schemes, particularly the Madoff heist, the IRS is easing rules for fraud victims, making it easier to claim losses on taxes, Investment News reports.
The timing of the rule changes, which lets defrauded investors claim investment fraud losses stretching back five years rather than two, is important because Oct. 15 — the tax filing deadline for those who filed for an automatic six-month extension — is only weeks away.
David Earley, tax senior manager for New York-based Deloitte LLP, explains the benefits for fraud victims:
Under the IRS' revised rules, investors defrauded in any Ponzi scheme after Jan. 1, 2008, can declare their net operating loss from the investment a "theft loss," which may be carried back five years instead of two, which was the case under the old rule. That is important, Mr. Earley said, because a theft loss is considered an ordinary loss that allows taxpayers to offset other types of income fully.
"It's a very beneficial loss," he said. "If you have to take a loss, that's the kind of loss you want to have."
"Beneficial loss" has the hollow ring of "moral victory" to it. But it must be better than an "unbeneficial loss" or "immoral defeat."
IRS rules for victims of fraud in focus as deadline looms [Investment News]
(Photo: stuartpillow)
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Comments:
Let me fix the first sentence for you:
Responding to all the high-profile Ponzi schemes, particularly the Madoff heist, the high-profile Pozi scheme know as the IRS is easing rules for victims of other frauds, making it easier to claim losses on taxes, Investment News reports.
So if I understand this
If I was defrauded by a ponzi scheme after Jan 1 of 2008, any money I also invested through Jan 1 of 2006 would have been eligible previously. Now it's extended to Jan 1 of 2003? Is that accurate?
But still you can't claim losses from the sale of a residence. What about those who make money on a Ponzi scheme and have to pay it back via a lawsuit? Are they eligible? (it's happening even in TX right now)
Assuming you meet the 2/5 test (two years living in the home within the 5 years prior to sale, does not need to be 24 consecutive months, however).
@wvFrugan: That's pretty quick no doubt. If you had filed in April, you would probably have waited 6 weeks for a direct deposit, but since this is a generally quiet period for the IRS, its not surprising it happened with speed.
Gains, however ill-gotten they are, are still taxable to those who thieved them!
I had a friend whose wife embezzled $60k from her employer. After having her convicted of the theft, they also sent her a 1099 so they could claim the tax writeoff. The result of that is that the IRS came knocking for their tax on her ill-gotten gains. She eventually made a full restitution, but she does not then get to claim that restitution, even though her former employer has to claim the recovered cash as income.
So, any monies paid into funds that turn out to be based on fraud are deductible, and it's extended from two years to five years of contributions. Seems fair.
I hope they're not making it so unrealized "gains" aren't included, however.
Something doesn't completely sit right to my eyes, however. It seems likely that even credulous victims assumed that Bernie was pulling a fast one, only on their behalf.
@ShruggingGalt: If you have to pay it back, it will probably count as a loss. A more interesting question is will you be allowed to go back and amend your returns from prior years, even beyond the usual three open years, to eliminate the gains you claimed?
@Trai_Dep: That's the heart of the con - you know something is amiss, but the payout is too good to resist. So you don't look too closely. People who weren't interested in 'beating the market' or making ridiculous returns wouldn't have been conned by Maddoff & the others. Obviously, he lied & deceived people, but it wasn't theft - they handed the money over willingly (as is true in most cons).
(An important exception would be people who didn't directly invest with Madoff or the other ponzis, but whose funds got to him through intermediaries. I don't fault them at all).
There's a neat recent piece on NPR about the con man & the American psyche, and how this type of scheme suits our national narrative. This is one of the bits that says a lot more eloquently what I was thinking & maybe what you were getting at:
To a tee, every single one of his victims are people whose eyes light up as they see the riches before them, or the perceived riches, the illusory riches, and gladly give the confidence man what he needs, which is confidence, confidence that the confidence man will deliver.
Full version here: [www.onthemedia.org]
@zacox:
One of the little tricks up the sleeves of federal prosecutors in drug cases is the ill-gotten gains clause.
Interestingly enough, a smart dope dealer would ask for a receipt - you can deduct the cost of the dope against the revenues from drug sales in order to determine the taxable income from your venture. But have fun running from your supplier when you name them in court!
The shame is Madoff was the head of a legitimate trading house for a number of years. His legit investments never had a down year (imagine that!), though many think he was using his off-the-books investment monies to support the legit stuff.
A piece in Barron's profiling some doubts about the Madoff model was very interesting. It was written in 2001.
@zacox: Hey, they did the same thing at my husband's workplace. Except this woman funneled money to a variety of relatives using bogus POs, so they all got 1099s.
I think the Feds are doing everything possible to pump money into this economy. A few weeks ago I finally filed my 2006 taxes, I didn't need to except to get a refund of some penalty pre-payment and tax withholding from a retirement account I cashed out due to my disability. In under 10 days from dropping it in the mail, I had the money direct deposited in my checking account. I was impressed at the speed.