Tax Relief - Facts, Fiction and Future

INVESTMENT FRAUD VICTIM’S TAX RELIEF
THROUGH IRC SECTION 165 (c)(2)

FACTS – CURRENT TAX LAW HELPING VICTIMS OF INVESTMENT THEFT
Current law includes but is not limited to, the following facts:
IRC 165 (c)(2)
• Law was established in 1954 to help investment fraud victims recover a portion of their losses through tax.

• Deduction allows qualifying victims to take their total net loss against ordinary income in a single year.

• Deduction allows for the taxpayer to go back three years after declaring the loss in the “Year of Discovery” if a Net Operating Loss (NOL) remains, or, they can waive their right to go back, and carry the NOL forward up to 20 years.

• Deduction allows for up to a 20 year carry forward, with the exception of when the 3 year carry back is utilized, which subsequently creates the potential for a 23 year benefit.

• Losses in IRA and Pension Funds Do Not Qualify.

• The taxpayer must prove the investment was made and lost by reasons of theft as defined in the state where the transaction took place.

• Taxpayer must exhaust all reasonable means of recovery.

• Taxpayer must be able to prove privity (there was a first hand relationship between the thief and the victim) in order to qualify. Ponzi scheme victims are generally not held to this requirement but that I’m aware, that exception is not written as fact.

• (Some) IRS agents consider any form of pending legal action (individual, class action, federal indictments, bankruptcy or receivership) as potential recovery and will deny a claim until such time as that open pursuit of recovery is resolved.

• IRS requires a victim to provide proof of cost basis (copies of checks, front and back, wire transfer confirmations, disbursements, withdrawals, recovery, etc.).

• Taxes on phantom income are recoverable in full but are only allowed to be carried back 3 years. The balance (NOL) can be carried forward up to 20 years.

FICTION – MISINFORMATION COMMONLY GIVEN TO THE PUBLIC
• Before a taxpayer can claim a deduction, they must first exclude 10% of their Adjusted Gross Income and $100 per item – Wrong. Although originally an aspect of the deduction, this exclusion was eliminated 25 years ago by the Tax Reform Act of 1984.

• 2 Year Net Operating Loss Carry Back – Common misconception. Other than in 2002, when Congress allowed an exception allowing for 5 years, the carry back has always been 3. The 2 year carry back does not apply to investment losses caused by theft.

• Up to 50% recovery of loss – Misleading. In my experience, taxpayers should expect to receive a total benefit between 10 – 20% of their loss.

• The deduction is taken in the year victims discover the money is gone – Maybe but not likely.

• The deduction is simple to obtain – Really? It takes a knowledgeable and experienced 165 tax preparer to guide both taxpayers and the IRS agents through this process

FUTURE – NEW PROPOSED LEGISLATION
For some time, I have been trying to get Congress to see the need for changes in the law. The size of the Madoff ponzi scheme helped me with my mission to get congress attention. In doing so, they are now discovering how prevalent investment theft and ponzi schemes are in America. Congressman Kendrick Meek of Florida’s 17th district moved quickly and proposed new legislation on February 24, 2009.
Proposed changes to current tax law.

• Will allow a 10 year carry back (or length of time in fraudulent investment, whichever is lesser) on cost basis and taxes paid on phantom income verses the current carry back of 3 years. Given the fact that a great deal of injured investors are in the retiree/elder categories and have had little to no income over the last several years, this change will hopefully increase the chance of them reaching a year where significant taxes were paid.

• Proposes to provide assistance to individuals who contributed to charitable organizations. This is a new aspect to the law and it needs to be further examined in order to determine just who gets what benefits?

• New legislation uses the word “estimate” verses “ascertained”. This may be a big help in the filing of the claims in a reasonable amount of time, but it is not definitive and more work needs to be done.