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Date: January 29, 2010
Subject: Ponzi Schemes and Fraudulent Investments … Huge Tax Deduction

This is
G&G Associates
Tax & Financial Consulting Services

Ponzi Schemes and Fraudulent Investments … Huge Tax Deduction

(PLease forward on if you know someone who might have gotten caught up}

Imhotep (Wisdom To You) G&G Readers,

Were you one of the many unsuspected individuals taken advantage of by one of the many “Ponzi Schemes”, “Bank Closures” or “Real Estate” investment schemes that took place in conjunction with the boom over the past several years? Well, the IRS has recognized this and has provided a means to allow those caught up in these shenanigans to be able to recoup a “BIG” chunk of their losses via your tax return.

In recognition of the magnitude of certain fraudulent investment arrangements (such as the Madoff investment scheme), the IRS has issued guidance concerning an individual taxpayer who, in a transaction entered into for profit and it is later discovered that the activity was a criminally fraudulent “Ponzi” scheme (which the taxpayer did not know prior to its discovery), and the taxpayer sustains a loss from the scheme (Rev Ruling 2009-20, 2009-9)…

The taxpayer may claim a “theft loss” for his or her investment instead of an “investment” loss…WHICH IS HUGE…because the perpetrators of such a scheme actually deprived investors of money by criminal acts. Because the taxpayer entered into a transaction for profit, the theft loss may be claimed as an itemized deduction on your (SCH – A) not subject to the “$500” floor in 2009 ($100 floor in 2010 and thereafter) or the 10% of adjusted-gross-income (AGI) floor for miscellaneous itemized deductions, or the overall limit on itemized deductions based on a percentage of AGI or total itemized deductions.

The loss is deductible in the year discovered (see sec 4.04 of Ruling for discovery definition), and the deduction amount includes the amount invested in the scheme, less any amounts withdrawn, reimbursements, and claims for which there is a reasonable prospect of recovery.

“HERE IS WHERE THE DEDUCTION CAN BE HUGE”… To the extent that the taxpayer’s theft loss deduction creates or increases a net operating loss (NOL) in the year the loss is deducted, the taxpayer may carry back up to three years and forward up to 20 years the portion of the NOL attributable to the theft loss. “If the loss is an applicable 2008 NOL (b/c of the IRS Safe Harbor Rule), the taxpayer can elect a three-, four-, or five year carry back and/or use the deduction 20 years into the future.

Under an optional safe harbor, a qualified investor can deduct as theft losses up to 95% of qualified losses that he or she experienced from a Ponzi scheme; up to 75% of qualified losses may be deducted if the investor intends to pursue potential recovery via insurance, the SIPC or other loss protection (Rev Proc 2009-20). This safe harbor is intended to avoid potentially difficult problems of proving how much prior-year income was fictitious, as well as to minimize compliance and administrative burdens on taxpayers and the IRS.

LOSS ON BANK DEPOSITS

Individuals may elect to treat the loss on a non-business account in an insolvent or bankrupt financial institution as a personal casualty loss in the year in which the loss can reasonably be estimated (Code Sec. 165(l). If elected, the casualty loss is subject to the deduction limitations.

These elections are made on Form 4684, Casualties and Thefts.

So, as you can see this can be a huge tax refund for those individuals that fall into one of these categories. Unfortunately, the IRS never makes it easy to claim these refunds. There are strict procedures that need to be followed; mandatory documents to claim the deduction and the return “MUST” be mailed in. So, you can’t e-file your return to claim this deduction. Also, depending on what year you declare the discovery of the Scheme, it might require you to do an Amended tax return.

To show you how huge a deduction this could be, let’s do some math. Let’s say you invested $10000 in one of the schemes mentioned above and you were in the 30% tax bracket. You would be reimbursed $3000 of the $10,000 loss you would be claiming.
If the tax refund owed to you exceeds the amount of taxes you paid that year, you could go back two years (safe harbor allowance – 5 years) and get a refund on taxes already paid or apply it 20 years into the future until you recover the amount owed to you from the deduction.

To make sure you have your documents completed properly, contact G&G Associates Tax & Financial Consultant Services and we’ll make sure you’ll get back all that is allotted to you.

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Asante Sana (Thanks)
Gary Gray
Tax & Financial Consultant, RFC
G&G Associates
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