Embezzlement with un-filed returns

[DaveO]

I have a C-Corp that has been the victim of a huge embezzlement. The office manager made off with an amount in the high 6 figures. The manager stiffed suppliers, failed to file and pay taxes and withdrew funds from the corporate line of credit.

We are preparing the 1120 for the last 3 years. What would be the correct way to handle the amounts embezzled on the tax returns? The Taxbook says to deduct in the year the theft occurred or on the year discovered. Is this a choice? Since the returns are not filed we can take the amount of the embezzlement each year on the 4684. The first as yet un-filed return would include all amounts up to that date. Each subsequent return would have the additional amounts embezzled in that year. Does this sound correct?

Any input would be greatly appreciated. This is a huge mess that will take a long time to clean up. The embezzler’s case is before a grand jury and an indictment should be forthcoming. It’s unlikely that restitution in any substantive amounts will be received.

[ChEAr$]

defalcation

I like that word; heard it years ago and had to look it up then.

Since you're filing three years' returns, I assume you'll have to come up with correct
balance sheets reconstructed of course that will prove the embezzlements. So
each year's loss stands on it's own. If you were to lump them all together on the
latest return, it would probably cause an NOL anyway to be taken back.

[OldJack]

When the money was taken... something must have been charged/expensed on the books. You may have already deducted some or all of the embezzlement.

[DaveO]

We are compiling the books now.

The embezzler was also the bookkeeper (big surprise). The records were pretty much garbage and we are re-compiling from the bank statments and other source documents.

Oh and ChEAr$, I love that word. Deflacation, I'm going to use it in the penalty abatement request. Hope the IRS has a dictionary.

[Davc]

Taxbook says to deduct in the year the theft occurred or on the year discovered. Is this a choice?

That's not what mine says on 4-21. It says to deduct in the year the CASUALTY occurred or the THEFT was discovered. When was the theft discovered? 2006? 2007? That would be the year to take the deduction.

[TaxBird]

The embezzler was also the bookkeeper (big surprise). The records were pretty much garbage and we are re-compiling from the bank statments and other source documents.

Oh and ChEAr$, I love that word. Deflacation, I'm going to use it in the penalty abatement request. Hope the IRS has a dictionary.

Dave...not to sound churlish but...you misspelled 'defalcation'.

[ChEAr$]

Ah, a kindred spirit,

Dave...not to sound churlish but...you misspelled 'defalcation'.

who must have recently taken the Word Power quiz in latest issue of
Readers' Digest.

How many did you get, out of 16?

[erchess]

Perhaps it would help Dave

to reflect that THEFT is one sort of CASUALTY. It would also be unusual for damage from a CASUALTY other than THEFT not to be discovered in the year it occurred.

[DaveO]

I agree, Thank you

to reflect that THEFT is one sort of CASUALTY. It would also be unusual for damage from a CASUALTY other than THEFT not to be discovered in the year it occurred.

And after re-reading the section in makes perfect sense to me. But do I have to show the embezzled amount on the balance sheet each year until I can take the theft loss?

[TaxBird]

Nah. I missed it.

who must have recently taken the Word Power quiz in latest issue of
Readers' Digest.

How many did you get, out of 16?

It's more of an annoying compulsion I have to point out things in an effort to be helpful.

And, I admit, a 'tiny' bit of amusement over the playing out of the unwritten Murphy's Law that states "The one who points out a spelling error or insults the intelligence of imaginary others' will invariably suffer the same fate".

With this in mind, I am especially mindful of my spelling when I am pointing out the misspellings of others. I still sometimes get it wrong.

By and large though, it's merely an unfortunate projection of my own need to be helped when I inadvertantly mess something up.

[Davc]

to reflect that THEFT is one sort of CASUALTY. It would also be unusual for damage from a CASUALTY other than THEFT not to be discovered in the year it occurred.

Perhaps it would help you to read the instructions for Form 4684. They make it clearer than the TB.