Loss Due to Wire Fraud

[Forensicacctnt]

Taxpayer and wife lost $30,000 in 2017 due to hacking of the sender's email and funds were wired by the client to a bank account where the perpetrator withdrew the funds. Investigations done by several parties to the transaction were not successful in recovering the funds. No insurance known to cover this loss either. I have not found any reference where this could be deducted as a loss in the tax return.
Is there a provision in the tax law for this type of loss?
Thank you especially during this very busy time!

[TAXNJ]

Where have you....

Taxpayer and wife lost $30,000 in 2017 due to hacking of the sender's email and funds were wired by the client to a bank account where the perpetrator withdrew the funds. Investigations done by several parties to the transaction were not successful in recovering the funds. No insurance known to cover this loss either. I have not found any reference where this could be deducted as a loss in the tax return.
Is there a provision in the tax law for this type of loss?
Thank you especially during this very busy time!

looked for a reference(s) ? Have you tried TTB or IRS website?

https://www.irs.gov/taxtopics/tc515

[ATSMAN]

I prepared the casualty loss for a taxpayer with similar situation

Make sure taxpayer has a police report and also a statement from the bank that there was an unauthorized withdrawal for which the bank is not reimbursing the account owner.

Usual rules apply the haircut is $100 plus 10% of AGI.

[Burke]

You imply (but do not say whether) the funds were withdrawn without personal action by the TP. But even in the situation where the TP actually sent the funds voluntarily and it can be documented that it was fraud, a tax loss deduction may be allowed. As the others say, it is Form 4684 - casualty loss -- subject to limitations and the rules for documentation. It must be deducted in the year of discovery, even if the funds were paid over one or more tax years. It must be reported to the police; who will laugh at the TP and not really take any kind of action, but TP needs to insist on them providing him with a copy of the report. If TP is entering any kind of lawsuit to recover funds, class action or otherwise, it would have to wait on the outcome, but it is not necessary to go to that extent to claim it on the tax return if reasonable efforts have been made to attempt recovery. The deduction is gone for 2018 for this type of loss.

[Forensicacctnt]

Wire Fraud

You imply (but do not say whether) the funds were withdrawn without personal action by the TP. But even in the situation where the TP actually sent the funds voluntarily and it can be documented that it was fraud, a tax loss deduction may be allowed. As the others say, it is Form 4684 - casualty loss -- subject to limitations and the rules for documentation. It must be deducted in the year of discovery, even if the funds were paid over one or more tax years. It must be reported to the police; who will laugh at the TP and not really take any kind of action, but TP needs to insist on them providing him with a copy of the report. If TP is entering any kind of lawsuit to recover funds, class action or otherwise, it would have to wait on the outcome, but it is not necessary to do so to claim it. The deduction is gone for 2018 for this type of loss.

Additional detail to clarify what happened; the law firm working with my client sent an email to client stating the bank and other details for client to wire funds. Before the client executed the wire, he received a second email from the law firm directing him to change the bank and account number he was send the funds to. Unfortunately, the client did not question the law firm to verify the change in the bank was correct. It was this second email that came from the perpetrator who had hacked the law firm's email. The hacker changed one letter in the lawyer's email address and the client did not notice this also. So after the funds were wired to the incorrect bank, the perpetrator withdrew the funds from an account he had set up. The bank even has a photo of the person withdrawing the funds. The is a police report from the local force but they could not get the law enforcement in the state of the bank to take any action. I will make sure the client has documentation of what the bank did on this matter. In the end, no recovery was made and no lawsuits were filed.
I will use Form 4684 as suggested.

Thanks to all for your help! This will certainly help the client on his tax return for 2017 even with the $100 plus AGI limitations.

[ATSMAN]

Additional detail to clarify what happened; the law firm working with my client sent an email to client stating the bank and other details for client to wire funds. Before the client executed the wire, he received a second email from the law firm directing him to change the bank and account number he was send the funds to. Unfortunately, the client did not question the law firm to verify the change in the bank was correct. It was this second email that came from the perpetrator who had hacked the law firm's email. The hacker changed one letter in the lawyer's email address and the client did not notice this also. So after the funds were wired to the incorrect bank, the perpetrator withdrew the funds from an account he had set up. The bank even has a photo of the person withdrawing the funds. The is a police report from the local force but they could not get the law enforcement in the state of the bank to take any action. I will make sure the client has documentation of what the bank did on this matter. In the end, no recovery was made and no lawsuits were filed.
I will use Form 4684 as suggested.

Thanks to all for your help! This will certainly help the client on his tax return for 2017 even with the $100 plus AGI limitations.

Sending wire transfer instructions in an e-mail or text message is like yelling it out in an open crowd! Crooks used a similar method with a town treasurer in MA to steal funds.

I am not a lawyer, but does the taxpayer have any claim against the law firm??

[Forensicacctnt]

Sending wire transfer instructions in an e-mail or text message is like yelling it out in an open crowd! Crooks used a similar method with a town treasurer in MA to steal funds.

I am not a lawyer, but does the taxpayer have any claim against the law firm??

The client asked the lawyer about his firm having insurance to cover this situation and the lawyer said if he asked his insurance company, "they would laugh at him". Also, when the client asked if the lawyer was going to change his email address he said no. He should change his email address immediately and perhaps his procedure as to how he communicates wire information. (The hacker inserted one letter in the lawyer's last name and my client did not recognize the difference). But as you mention putting wire transfer information out like this is very risky, my client should have called the law firm when receiving the second email stating to change the bank and account number and question this!!

Thanks
Carl

[TAXNJ]

The client asked the lawyer about his firm having insurance to cover this situation and the lawyer said if he asked his insurance company, "they would laugh at him". Also, when the client asked if the lawyer was going to change his email address he said no. He should change his email address immediately and perhaps his procedure as to how he communicates wire information. (The hacker inserted one letter in the lawyer's last name and my client did not recognize the difference). But as you mention putting wire transfer information out like this is very risky, my client should have called the law firm when receiving the second email stating to change the bank and account number and question this!!

Thanks
Carl

This is one interesting scenario.

As you said in a prior post, .... "Additional detail to clarify what happened; the law firm working with my client sent an email to client stating the bank and other details for client to wire funds. Before the client executed the wire, he received a second email from the law firm directing him to change the bank and account number he was send the funds to. Unfortunately, the client did not question the law firm to verify the change in the bank was correct. It was this second email that came from the perpetrator who had hacked the law firm's email...."

and now in this post, what is the story of your client and the client's attorney communicating and disclosing only via email with what seems to be sensitive information?

As you say in the post, your client gets an email from the attorney "stating the bank and other details for client to wire funds" and gets a second email (hacked) and the client's attorney is not concerned with the hacking issue!! (Unless not reading your post correctly). Also, the comment about client's attorney reponse about the insurance!!

This is a classic scenario for the client to get another attorney to review the issue you posted. But that is not your responsibility to advise the client for a second attorney.

Again, interesting scenario.

[JohnH]

This is an interesting scenario, and one I can relate to (although in a positive manner). We bought a house last year using a "dry close" and pretty much handled everything with the attorney's office via email. My relationship with this attorney and his paralegal goes back over 35 years, so we're very comfortable using email for most matters. The paralegal emailed me the info on where to wire the funds for the purchase, then she called me to verify the info by phone. She warned me to let them know if I received any sort of communication changing anything about the transaction.

When I contacted my credit union to wire the money, they said I must come in to a local branch with the wire instructions from the attorney's office. They also said specifically that the wire instructions could not be an email, must be on the attorney's letterhead, and had to be an original. Thinking I could circumvent the process and save myself some time, I asked the paralegal to send me a pdf, but she said I needed to come by their office or else she could send me an original via snail mail. I initially thought everyone was being overly cautious, but nevertheless I complied.

The letter the paralegal gave me had an old-fashioned raised seal pressed onto the letter beside the signature line. When the paralegal explained the reason for all those precautions, I was appreciative of the fact that both the lawyer's office and the credit union were protecting both their own interests and mine. I hand delivered the letter to the credit union, and only then would they release the wire transfer. Too bad this client in this thread didn't get the same type of service. Email & texting simplify lots of life's tasks, but people need to keep their guard up.

[Burke]

The client asked the lawyer about his firm having insurance to cover this situation and the lawyer said if he asked his insurance company, "they would laugh at him". Also, when the client asked if the lawyer was going to change his email address he said no. Thanks.
Carl

This would be most troubling to me, and if I were the client I would pursue the matter with this attorney. Law firms most assuredly have E&O. Cyber-theft coverage is now offered as a common option. Find out if he has it and insist on him filing a claim. I don't get the comment "they would laugh at him." Most likely, he doesn't wish to have his premiums rise. He may not have this type of coverage, which would actually be negligence in this day and age, not even considering he put confidential bank information in the FIRST email. Which shows he was not taking reasonable precautions as a matter of policy. He may have some liability here. Perhaps threatening further action would get his attention......

[Forensicacctnt]

This would be most troubling to me, and if I were the client I would pursue the matter with this attorney. Law firms most assuredly have E&O. Cyber-theft coverage is now offered as a common option. Find out if he has it and insist on him filing a claim. I don't get the comment "they would laugh at him." Most likely, he doesn't wish to have his premiums rise. He may not have this type of coverage, which would actually be negligence in this day and age, not even considering he put confidential bank information in the FIRST email. Which shows he was not taking reasonable precautions as a matter of policy. He may have some liability here. Perhaps threatening further action would get his attention......

Thank you, I appreciate your raising these points; they are spot on. I will discuss this further with the client. The attorney is not being responsible and not being cautious in his procedures. Thanks again and well said.

Carl

[TAXNJ]

Thank you, I appreciate your raising these points; they are spot on. I will discuss this further with the client. The attorney is not being responsible and not being cautious in his procedures. Thanks again and well said.

Carl

Your concern for your client is understandable, but is your responsibility for tax advice only?

A suggestion. Unless you are a practicing attorney, be careful about your comments about the attorney, unless you were a party in the original process , and not just getting hearsay. Also, that your statements are clear that it is not a substitute for seeking personalized legal advice from an attorney licensed to practice in your client’s area.

Again, interesting scenario.

[Forensicacctnt]

Loss Due to Wire Fraud

Thank you for your comments. I should not have made the statements about the attorney. It was out of frustration for the client, but I must not speak out like this.

Carl