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Ponzi scheme victims can seek relief on income taxes

August 20th, 2013 | by Barrett Newkirk | Comments

Victims of Ponzi schemes, like the the Grifphon hedge fund scam described in my article Sunday, have another way to lessen their loses besides filing a civil lawsuit and hoping for the best. In the wake of the Bernie Madoff case, the IRS in 2009 changed its rules to allow fraud victims to count the damage as a business loss on their income taxes.

Bruce Legawiec, a partner with the CPA firm Osborne Rincon in La Quinta, brought the rule change to my attention after reading about how some Coachella Valley residents got ensnared in Grifphon.

“(As) strange as it may seem,” Legawiec wrote in an email, “people being scammed  are often too embarrassed to tell anyone of their misfortune, but if they were educated as to the potential tax savings, and file the returns correctly, then they would at least be able to recoup some of their losses.”

Legawiec noted that there doesn’t have to be a criminal conviction to claim a loss due to fraud, so victims don’t have to wait for the justice system to run its course before they seek relief on their taxes. Of course, talk to your own accountant if you think this may benefit you. Here’s how Legawiec summarized the potential benefit:

(Under) the old rules the investor would only get to claim a loss of $3,000 a year.  If they were in a marginal tax bracket of 25%, this would mean annual tax savings of $750.  HOWEVER, under the Madoff Rule, they would be able to claim a current tax loss of $95,000 (95% of $100K) and in the 25% tax bracket that would save them $23,750 in income tax.   So a much better tax result.

The IRS released the new rules in April 2009, a month after Madoff pleaded guilty to operating a multi-billion-dollar Ponzi scheme for decades.

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