Scam write-offs

[JenMO]

how long should i wait to write off scam. TP got pulled into two. The first one I set up as starting up costs and amoritized. The second one havent' done anything yet (09). I 'm sure no money is ever going to be realized. Since I set up as amort, can I write the whole amount off this year on the C, or would it be SchD? The second one - Sch D loss?

[taxea]

has the client filed a police report? Any chance of an arrest or criminal charges? has client made any attempts to recover the money? until these things are done it is too soon to make a claim for the loss

[Gary2]

You say "scam", but you treated the first one as self-employment. Do you mean "scam" as in "illegal, e.g. Ponzi scheme" or as in "technically legal but totally oversold scheme?"

If it's definitely criminal, then it's a theft loss on 4684. If not, then in the absence of any prosecution for consumer fraud, I'd be inclined to classify as either hobby or investment expense, depending on the nature of the scheme. Some network marketing programs can result in legitimate self-employment income, but I'd be reluctant to classify it as a business if the individual gives up within a year.

[JohnH]

Agree with Gary. You don't really give quite enough info to determine whether you should use Schedule C or D or other means of reporting.

I'd respectfully disagree with the assertion that nothing can be done until a police report is filed. The facts and circumstances govern, not the filing of any particular piece of paper with a particualr agency. In some cases the state or local consumer protection agency might be a more appropriate place to register a complaint. In many cases filing a police report or taking any sort of legal action is appropriate, but in many other cases it would just be additional wasted effort. It's all about using good judegment given all the facts.

As a general rule, I think it's wise to claim any loss of this type in the earliest year possible, but continue to document events if there's anything to document. That way, the worst that can happen in an audit is that IRS makes you move the loss to a subsequent year. On the other hand, if you should have claimed the loss in an earlier year and that fact is discovered in an audit, you're out of luck if that earlier year is a closed year due to the SOL.

[JenMO]

both scams were sold as a way to make money. AIG promotions was one, I've looked it up and found nothing good. It seems lots of people were sucked in by promises of making money. I didn't set up as a business in 09 waiting to see if anything developed, but, of course, nothing. He didn't pursue after reviewing as it looked like a deep hole. Should I look at the Better Bus Bureau, print what they have to say. Would that help document? Police reports, writing letters, looks fruitless.

[JohnH]

The amont of time you devote to research, etc should be in proportion to the tax benefit derived from the loss. That is, he needs to save AT LEAST enough to pay for your time researching it plus $1.

Of course, the client could always do their own research, but maybe that's expecting too much...

[taxea]

reporting a loss says that you must include a statement of the effort/s you made to recover the money/goods/etc. All I'm saying is that a police report is one document that will assist in that effort and if it was a criminal offense (i.e. theft of services) the TP would be remiss in not attempting to have the responsible brought to justice. Many times the courts will order restitution as a part of the sentencing.