If you have been a victim of a Ponzi scheme and need to find out how to deduct your tax losses it is best to contact a Tax Attorney, CPA or your own tax advisor.

It is wise to have experienced tax professional apply these losses on your tax returns. This matters are not for the inexperienced.

There are very specific requirements by the Internal Revenue Service.

I am a former IRS agent and I can tell you many of these Ponzi scheme tax losses are audited by the IRS.

Before taking a loss you need to make sure that you qualify for the loss and have all the required documentation to support your loss.

IRS generally has a group that reviews Ponzi scheme losses and deductions taken on tax returns.

Contact us today and we can help you through this process.

First of all, what is a Ponzi Scheme?

A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator.

Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the high returns requires an ever-increasing flow of money from new investors to sustain the scheme.

Ponzi Scheme     So how do I deduct my loss?

The Internal Revenue Service  has issued two guidance items to assist taxpayers who are victims of losses from Ponzi-type investment schemes.

Example- Madoff was a pure Ponzi Scheme.

The IRS Revenue Ruling 2009-9 clarifies the income tax law governing the treatment of losses in such schemes.

The IRS Revenue Procedure 2009-20 provides a safe-harbor method of computing and reporting the losses.

The IRS revenue ruling is important because determining the amount and timing of losses from these schemes is factually difficult and dependent on the prospect of recovering the lost money which may not become known for several years.

Also it clarifies the older guidance on these losses that is somewhat obsolete.

This revenue procedure simplifies compliance for taxpayers and administration for the IRS by providing a safe-harbor means of determining the year in which the loss is deemed to occur and a simplified means of computing the amount of the loss.

Safe harbor is a very important concept.

The IRS Revenue Ruling 2009-9

Under IRS Revenue Ruling 2009-9 an investor is entitled to a theft loss, which is not a capital loss.Once again, this is key.

A theft loss from a Ponzi-type investment scheme is not subject to the normal limits on losses from investments, which typically limit the loss deduction to $3,000 per year when it exceeds capital gains from investments.

The revenue ruling clarifies that “investment” theft losses are not subject to limitations that are applicable to “personal” casualty and theft losses.

The loss is deductible as an itemized deduction, but is not subject to the 10 percent of AGI reduction or the $100 reduction that applies to many casualty and theft loss deductions.

The theft loss is deductible in the year the fraud is discovered, except to the extent there is a claim with a reasonable prospect of recovery.

Determining the year of discovery and applying the “reasonable prospect of recovery” test to any particular theft is highly fact-intensive and can be the source of controversy. This is a issue close looked at by IRS.

The IRS revenue procedure accompanying this revenue ruling provides a safe-harbor approach that the IRS will accept for reporting Ponzi-type theft losses.

The amount of the theft loss includes the investor’s unrecoverable investment  including income as reported in past years.

The IRS ruling concludes that the investor generally can claim a theft loss deduction not only for the net amount invested, but also for the so-called “fictitious income” that the promoter of the scheme credited to the investor’s account and on which the investor reported as income on his or her tax returns for years prior to discovery of the theft.

A theft loss deduction that creates a net operating loss for the taxpayer can be carried back and forward according to the time frames prescribed by law to generate a refund of taxes paid in other taxable years.

Revenue Ruling 2009-9 thus lays down the following holdings:

• A loss from criminal fraud or embezzlement in a transaction entered into for profit is a theft loss, not a capital loss, under § 165.

• A theft loss in a transaction entered into for profit is deductible under § 165(c)(2), not § 165(c)(3), as an itemized deduction that is not subject to the personal loss limits in § 165(h), or the limits on itemized deductions in §§ 67 and 68.

• A theft loss in a transaction entered into for profit is deductible in the year the loss is discovered, provided that the loss is not covered by a claim for reimbursement or recovery with respect to which there is a reasonable prospect of recovery.

• The amount of a theft loss in a transaction entered into for profit is generally the amount invested in the arrangement, less amounts withdrawn, if any, reduced by reimbursements or recoveries, and reduced by claims as to which there is a reasonable prospect of recovery. Where an amount is reported to the investor as income prior to discovery of the arrangement and the investor includes that amount in gross income and reinvests this amount in the arrangement, the amount of the theft loss is increased by the purportedly reinvested amount.

• A theft loss in a transaction entered into for profit may create or increase a net operating loss under § 172 that can be carried back up to 3 years and forward up to 20 years. An eligible small business may elect either a 3, 4, or 5-year net operating loss carry back for an applicable 2008 net operating loss.

• A theft loss in a transaction entered into for profit does not qualify for the computation of tax provided by § 1341.

•  A theft loss in a transaction entered into for profit does not qualify for the application of §§ 1311-1314 to adjust tax liability in years that are otherwise barred by the period of limitations on filing a claim for refund under § 6511.

If you have any questions regarding a Ponzi scheme tax laws call us today for free initial tax consultation.

Ponzi Scheme Victim – How to Deduct Your Tax Loss – Tax Attorneys & CPA’s – Ponzi Scheme Experts