The Internal Revenue Service issued a memo last month that said victims of certain impersonation and investment schemes might be eligible for a tax break.
Victims of sophisticated online scams are often dealt a double whammy. Not only is their money forever gone, but these stolen sums often generate giant tax bills when the funds are emptied from taxable retirement accounts.
Many of these victims are often left wondering what sort of recourse they might have. Tax regulators recently provided some answers, clearing the way for more victims to seek a tax break on more solid footing.
In a memorandum released on March 14, the Internal Revenue Service’s Office of Chief Counsel described which types of scams might qualify for tax relief, which included many investment schemes and some types of impersonation fraud. But it still excludes victims of other widespread digital crimes, including kidnapping schemes, for example, and romance-related fraud that did not involve investing.
“We are aware that taxpayers have suffered losses from various scams perpetrated by unknown individuals operating domestically and internationally,” the memo said. “However, the actual scam may vary, and the application of this advice is dependent on the taxpayer’s specific facts.”
There used to be a more equitable way for people with the largest fraud losses to deduct them from their income, using a tax deduction for victims of personal casualties, disasters and theft. But that and many other individual breaks were eliminated or narrowed as part of the Republican-led tax overhaul known as the Tax Cuts and Jobs Act of 2017, which helped to pay for broader tax cuts, including a reduced corporate tax rate.
The current structure of the deduction, effective from 2018 through 2025, treats victims unevenly. It can be used only in certain situations, even though many of these fraudsters are operating out of the same playbook.