Victims of Madoff and Other Ponzi Schemes - What New IRS Guidelines Mean

Guest Columnist Author: Marjorie A. Horwin, CPA - Morrison, Brown Argiz & Farra, LLP Last Updated: Mar 22, 2009 - 1:15:19 PM

Victims of Madoff and Other Ponzi Schemes - What New IRS Guidelines Mean
By Marjorie A. Horwin, CPA - Morrison, Brown Argiz & Farra, LLP
Mar 22, 2009 - 1:15:38 PM

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(HealthNewsDigest.com) - Victims of the Bernard Madoff (“Madoff”) scandal and other Ponzi schemes got answers to tough tax questions last week in the form of two pieces of legal guidance from the Internal Revenue Service (“IRS”). While the tragedy of this fraud had many repercussions, the tremendous array of tax issues faced by victims, rose to the top of the discussion. The IRS responded to demands by lawmakers and others to provide tax relief and to simplify tax issues and reporting with unexpected breadth.

It’s important to note that the IRS did not issues new laws, but rather released legal interpretation of existing law. Basically, the IRS guidelines offer safe harbor treatment for calculating and reporting tax losses from an investment theft.

The first milestone was allowing victims to seek tax relief in the year the fraud was discovered. For the Madoff case, that's 2008. For the Stanford case, that's 2009.

Victims can deduct up to 95% of their theft loss minus any potential recoveries from insurance or the Securities Investor Protection Corp (SIPC), in 2008. The unused portion of the theft loss may be carried forward or backward to years as early as 2003 in order to obtain tax refunds.