While Benrie Madoff was jailed last week after pleading guilty to charges surrounding his $65 billion Ponzi scheme, the IRS is busy issuing new guidelines for filing tax theft loss deductions.
Internal Revenue Service Commissioner Doug Shulman reached out to thousands of Ponzi victims to provide “safe harbor” procedures for taxpayers who sustained investment losses discovered to be criminally fraudulent.
In addition to simplifying and clarifying the filing process for those seeking refunds on taxes paid on “fictitious income,” the safe harbor provides relief for victims who complained they would have to wait years for liquidation and litigation to end before they could calculate the amount of their losses and get relief on their taxes.
The good news for Ponzi victims is that by using the safe harbor, they can declare a theft loss on 2008 tax returns (the year the fraud was discovered) for 95 percent of the amount they invested with Madoff. This is in addition to any “earnings” they left under his control, minus any withdrawals and amounts that have a reasonable prospect of recovery (including monies recovered through filing claims with the Securities Investor Protection Corp., which can be up to $500,000).
For victims suing an investment adviser, the safe harbor is reduced to 75 percent, while those not suing will be able to recover 95 percent. Either way, the full loss may be deducted when disputes are ultimately resolved.
And to complicate things just a little more, victims who are part of partnerships, or small businesses, will be able to go back 5 years to recover investments and phantom monies. Previously, it appeared victims could only go back three years. With this new ruling, a theft loss deduction that creates a net operating loss for the taxpayer can be carried back five years and forward 20 years to generate a refund of taxes paid in other taxable years.
Here’s a hypothetical scenario that might help illuminate the procedure (published on Time.com).
A Madoff victim with a balance of $1.5 million, but who withdrew $500,000 over the life of the account, would multiply the resulting $1 million by 95% (provided they are not suing Madoff) to yield their NOL, or a “net operating loss” of $950,000. The NOL would then be reduced further by whatever claims recovered from SIPC. If, for example, a victim were to receive from SIPC $200,000, that victim’s net operating loss would be $750,000, which would be the number used on tax returns to go back five years and forward 20 years from 2008 to recover monies against taxes paid.
More Tax Help, IRS News and Tax Relief Tips:
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