CAUGHT IN A $5k SCAM for a $1m SCENARIO

[Burke]

For #2 to apply, I would think your state attorney general would have had to initiate an investigation, not so sure the local police would suffice. As you said, they are not interested in pursuing these, and I can understand why. They don't have the time or resources. The perps are almost always overseas. You can check with the federal Consumer Protection Bureau but that's a long shot.

[TAXNJ]

…. However, see Instructions for Form 4684, Section B, and the related IRS bulletins listed on Page 6, for certain Ponzi-type schemes. (Not deductible if covered by insurance.)

and

See if anything on IRS website helps https://www.irs.gov/newsroom/help-for-victims-of-ponzi-investment-schemes

Thanks to both of you. Have considered this “safe-harbor rule” . As you know from this “safe-harbor rule”, will look into if #2 may apply because #1 & #3 would not because scammer has not be caught.
The amount lost to scams is incredible. We see more people fall victim especially Seniors losing more than 5k.

The special “safe-harbor rule” under which it will automatically accept Ponzi-type theft losses. Under this rule, the IRS will deem the loss to be the result of theft if: (1) the scheme’s promoter was charged under state or federal law with fraud, embezzlement, or a similar crime; or (2) the promoter was the subject of a state or federal criminal complaint alleging commission of such a crime, and (3) either there was some evidence of an admission of guilt by the promoter or a trustee was appointed to freeze the assets of the scheme.

[Gene V]

See if anything on IRS website helps https://www.irs.gov/newsroom/help-for-victims-of-ponzi-investment-schemes

[Lion]

It was a retirement account, a personal account, reporting ordinary income. Why do you think it is deductible?

[TAXNJ]

What am I missing here? This is a qualified account, hence the 1099-R reporting, right??

To get money out of a qualified account that generates a 1099-R, paperwork must be signed including disclosures. How did that work in this instance. What did the taxpayer give the crook, signed paperwork? If the taxpayer is married spousal consent is required?

Something does not add right?

Scams are bad news. This older client gave private investment account info to scammer who according to client went into client’s investment account and had it electronically withdrawn.

Sounds incredible but to describe the complete story would be involved. Also, waiting for police report.

Bottom line is this older client seems to have falling into the scams the IRS warns people about.

Thanks for the questions. Do you have a response to the OP question?

[TAXNJ]

The theft didn't happen until the scammer received the taxpayer's cash, post withdrawal. Cash is personal use property, I don't see how it can be investment use since it cannot be held for potential gain.

You raise a good point if the IRS considers “Cash is personal use property”. This would probably settle this scenario if you can share where in the code you found that definition. Thanks in advance.

[Rapid Robert]

The theft didn't happen until the scammer received the taxpayer's cash, post withdrawal. Cash is personal use property, I don't see how it can be investment use since it cannot be held for potential gain.

[ATSMAN]

What am I missing here? This is a qualified account, hence the 1099-R reporting, right??

To get money out of a qualified account that generates a 1099-R, paperwork must be signed including disclosures. How did that work in this instance. What did the taxpayer give the crook, signed paperwork? If the taxpayer is married spousal consent is required?

Something does not add right?

[Burke]

I updated the post you quoted. See if that addl info directs you to the right place.

[TAXNJ]

Are you trying to say it is a business loss? What type of account were the funds taken out of? From your OP, Item #3, it appears it came out of some type of retirement account. This is a personal loss, and while it used to be deductible as a personal theft loss, that was thrown out for years after 2018.

Yes, it was taken out of their IRA account and is being reported by their Investment firm as a taxable "Normal" Distribution (code 7). Was trying to see if it would be applicable as

"investment property" and the property was used in a "Passive Activity."

Trying to figure if there is some possible relief to this scam

[TAXNJ]

Why would it not be a casualty loss? and therefor not deductable.

Chris

If understanding your reply when the original post states "not a personal casualty loss".

To be clearer meaning it is not "personal" property rather "investment property" and the property was used in a "Passive Activity.

[Burke]

Are you trying to say it is a business loss? What type of account were the funds taken out of? From your OP, Item #3, it appears it came out of some type of retirement account. This looks like a personal loss, and while it used to be deductible as a personal theft loss, that was thrown out for years after 2018. However, see Instructions for Form 4684, Section B, and the related IRS bulletins listed on Page 6, for certain Ponzi-type schemes. (Not deductible if covered by insurance.)

[spanel]

Yes, client is aware of that but the question is "Where to deduct the loss on return if possible (not a personal casualty loss)?"

Why would it not be a casualty loss? and therefor not deductable.

Chris

[TAXNJ]

Tell him to close that account immediately! His bank can provide him with the paperwork to sign to transfer his balance to a new account. The scammer could steal more if that account remains open.

Yes, client is aware of that but the question is "Where to deduct the loss on return if possible (not a personal casualty loss)?"

[Lion]

Tell him to close that account immediately! His bank can provide him with the paperwork to sign to transfer his balance to a new account. The scammer could steal more if that account remains open.