Taxation of Ponzi Clawbacks
WATCH THIS 50-MINUTE EDUCATIONAL VIDEO: Understanding Ponzi Scheme Tax Loss. Presented by Richard S. Lehman, U.S Tax Attorney
SUMMARY:
Recovering Funds After Ponzi Scheme: Tax Strategies and Clawbacks Explained by Tax Attorney Richard Lehman
In a fascinating discussion on the aftermath of a Ponzi scheme, Tax Attorney Richard Lehman sheds light on the intriguing concept of tax refunds resulting from such schemes. As the scheme inevitably collapses, trustees take legal action to recover the money, suing those who profited from the scheme.
The efforts of these trustees have proven successful, leading to significant recoveries for many (if not all) individuals impacted by the infamous Madoff Ponzi scheme. These recoveries, known as clawbacks, have allowed affected individuals to regain a substantial portion of their funds.
Navigating this complex situation, the Internal Revenue Service (IRS) faced challenges in determining how to handle the payments repaid to trustees. To seek guidance, they consulted tax lawyers and the Government Accounting Office for their valuable input.
During this “Madoff” time two options emerged for managing clawbacks. The first involves deducting the amount paid as a clawback in the year it was repaid, thus utilizing it for tax refunds. Alternatively, a specific code section can be employed to revisit closed years and claim tax refunds based on profits earned during those years.
Expanding on the latter option, the mitigation section in the Internal Revenue Code allows individuals to reopen closed years, potentially resulting in larger tax refunds. This approach involves carrying back losses and taking advantage of higher tax brackets from previous years.
However, it is worth noting that the implemented Trump tax bill imposes restrictions on loss carrybacks, limiting the potential benefits of deductions to forward-only scenarios.
Value can be lost, without good professional advice.
- PRESENTATION SLIDES: Download as a PDF, 52 slides. Download presentation here.
- ARTICLE: Favorable Tax Consequences Related to Ponzi Scheme and the Clawback,
BNA 9-19-11, PDF https://www.lehmantaxlaw.com/pdf/BNA_9_2011.pdf.
