What Fraud Victims Need to Know About Claiming Theft Loss Deductions under Section 165: Be Prepared to be Audited
Michael Rozbruch, CPA
Victims of Investment Fraud Turning to Uncle Sam for Relief Should be Ready to Face Increased IRS Scrutiny
Thanks to the IRS tax code, there's a mini bail out in the works for the growing list of investors allegedly defrauded by
Bernie Madoff's $50 billion scheme.
Many charities and banking institutions, as well as high profile, high net worth individuals like Steven Spielberg,
Kevin Bacon and Jeffrey Katzenberger have lost billions of dollars in what experts are calling the biggest Ponzi schemes
in the history of Wall Street. Some victims claim to have lost everything, like Eric Roth, the screenwriter behind
"The Curious Case of Benjamin Button," who told the Los Angeles Times that he feels like, "the biggest sucker who ever
walked the face of the Earth."
But the good news for taxpayers is that they can seek relief from the IRS tax code by qualifying for a tax break that
until now, not many people have been eligible for.
Under IRC Section 165(c)(2) victims of white collar crimes can convert their capital stock losses into "ordinary"
losses and offset them against prior, current and future ordinary taxable income, thereby reducing the taxes paid in
those years, and receiving a refund with interest.
This helps recuperate any previously paid taxes while minimizing their future tax obligations. For instance, if fraud
victims who've lost $100 million in the scheme could recoup $30 to $40 million of that in taxes!
However, recovering losses under Section 165 is a highly technical, time consuming and complex process. And because it
generally involves amending prior years' tax returns, taxpayers who take advantage of this little known tax break
should be aware that they will inevitably become clear targets of IRS inquiry.
In other words, if you amend your tax returns to recuperate your losses, YOU WILL BE AUDITED BY THE IRS. Furthermore,
the current economic climate and the likelihood of falling tax revenues in the year ahead may make it even more difficult
to successfully seek relief from Uncle Sam.
My best advice for those hoping to take advantage of Section 165 to recover their financial losses is to hire an
experienced tax professional to help you through the process so you can successfully turn your financial life back around.
While there are clear tax benefits to deducting a fraud loss, remember that the incredibly complicated process of recuperating
your losses through this tax break will certainly put you under increased IRS scrutiny.
I've helped people in this situation before so I know how invaluable this tax strategy can be to anyone who has been wiped
out by investment fraud and is looking to regain their financial welfare.
About the Author:
Michael Rozbruch is one of the nation's leading tax experts. A Certified Tax Resolution Specialist (CTRS), licensed CPA in the state of Maryland
and the founder of Tax Resolution Services, he helps individuals and small
businesses solve their IRS problems and is dedicated to educating the public on tax planning and other strategies for managing their personal and
For more information on Investment Fraud Representation (link to
http://www.taxresolution.com/investment-fraud.asp) or for expert advice on reducing your IRS debt, visit
www.TaxResolution.com or call 866-477-7762.