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Lehman Tax Law > Blog > Ponzi Schemes Tax Laws > The Tax Law Still Allows A Tax Recovery Of Financial Theft Losses

The Tax Law Still Allows A Tax Recovery Of Financial Theft Losses

My experience of a small sample of accountants and lawyers has revealed that many do not know that there still is a business tax deduction for Ponzi Scheme losses and similar financial frauds that were invested in for profit.

There also still is a “Clawback” or “Mitigation” deduction available for investors that have made money in the Ponzi Scheme and must now repay to the investors that have lost money, the profits and at times the original invested principal of investors who profited from the fraudulent business scheme.

Consequently, there will continue to be a valuable deduction that can be as high as 50% of a tax on income; to those in the states and cities with high state and local taxes.

The tax benefits available to investors who innocently profited from the fraud and now must pay back the profits made in the theft and in some instances, the investors’ principal (capital) would be subject to a “Clawback”. The Trustee must protect the innocent investor who lost money because of the fact there never was any profit at all, since the invested funds were paid to the fraudulent thieves. This is called a “Clawback”.

Changes Resulting From The Trump Tax Bill

Code Section 165(c)(2) and 1341 of the Internal Revenue Code provide great help for the defrauded investor.

There are three items that have changed in this area of the law as a result of the “Trump Tax Cut & Jobs Act.” The first is that starting in 2018 there is no longer the right to carryback losses from financial theft. Deductible losses resulting from a financial theft may only be claimed in the year of the discovery of the theft and future years.

The second change is that tax rates have been lowered so that tax refunds that stem from post year 2018 financial theft losses, (not been discovered until after the year 2018 and after), may be refunded in a lower tax bracket than that which was available prior to 2018.

The third change in the law is the fact that the tax information Form 4684 that is used to report the theft loss has been clarified.

While a fraudulent theft loss in a trade or business or a for profit endeavor has been modified, that Code Section still provides for the deductible theft loss for a victim of a financial theft. Code Section 165(c)(2) still provides for the deductible theft loss for a victim of a financial theft that amounts to a criminal act.

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