The Spring 2009 TaxPro Journal issued by NATP has a great article about treatment of Ponzi-type scheme or other similar types of scams (such as Madoff) in which taxpayers have lost $$$. See Rev Rul 2009-09 and 2009-20 which sets out the legal position of the IRS & Treasury Dept, and safe harbor rules. Basically, the loss is treated as a theft loss, NOT subject to $100 floor and 10% AGI limitation, including previously reported income on prior returns. Deductible in year fraud discovered and can produce NOLs.