If you’ve been cheated in a Ponzi investment scheme “a la Bernie Madoff”, the IRS wants to cut you some slack. From previous experience, we know the feds will let you treat your loss as a tax-favored ordinary loss rather than a capital loss. Locally, Longcrier & Associates has had experience with helping clients caught up in the Estate Financial meltdown, and also Cedar Funding in Monterey County to name just two.
The IRS generally takes a dim view of taxpayer attempts to treat investment securities losses as anything other than capital losses. Capital losses fare poorly under our beloved federal income tax system. You can only deduct them to the extent of capital gains for the year, plus another $3,000 ($1,500 if you use married filing separate status). Any leftover capital losses get carried forward to the following year, and the same limitation rule applies all over again. As a result, it can take years to fully deduct big capital losses.
In contrast, ordinary losses are treated quite well. They can be written off against any type of income (salary, interest, dividends, capital gains, self-employment income, you name it). If you have a big ordinary loss that exceeds what you can deduct in the loss year, the excess can potentially create a net operating loss which can be carried back to previous years and recover taxes you paid earlier, or you can carry it forward to shelter income in future years, which will be especially helpful if tax rates go up.
The IRS issued guidance days after Bernard Madoff’s guilty plea, providing several generous safe harbors for qualified investors who were victims of Ponzi schemes. The safe harbors were designed to eliminate uncertainty about (i) the year of the loss, and (ii) how much was lost (i.e., because of problems in determining how much income that was reported in the scheme was fictitious and how much was real).
The safe harbors applied only to “qualified losses,” namely those resulting from a Ponzi scheme in which (a) the lead figure was charged by indictment with the commission of fraud, embezzlement or a similar; or (b) the lead figure was the subject of a state or federal criminal complaint, and either (1) the lead figure admitted the crime; or (2) a receiver or trustee was appointed with respect to the arrangement or assets of the arrangement were frozen.
Since the IRS published that guidance the deaths of some lead figures in Ponzi schemes have foreclosed authorities’ ability to charge them with criminal theft, leaving qualified investors in these cases unable to meet the definition of a qualified loss, or use the optional safe harbors.
In summary, now a qualified investor’s discovery year is his tax year in which: a) the indictment, information, or complaint is filed; or b) the complaint or similar document is filed or the death of the lead figure occurs, whichever is later.
If you are a victim of a Ponzi scheme or similar fraud, we have the experience and expertise to walk you through the process of benefiting from the IRS treatment of these losses.
Pursuant to IRS Circular 230, the Internal Revenue Service requires us to inform you that any tax advice included herein is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the IRS on the taxpayer. That said, please do not hesitate to contact us if you have any further questions regarding this matter.Tags: IRS