Madoff Investors Getting Some Relief from IRS

Mar 17, 2009   

Madoff Ponzi Scheme Victims may be able to receive tax relief and refunds by the new IRS guidelines.

Douglas Shulman, Commissioner of the IRS, announced to Congress that the relief is intended for those who incurred losses by Ponzi Schemes such as the one at issue in the Madoff Ponzi Scandal.

If Madoff investors reported and paid taxes on the earnings from their Madoff investment, they may be due a refund on those taxes because the profits reported were never actually realized.

At a Senate Finance Committee hearing, Shulman stated that the investors in some of the cases were actually entitled to a theft loss deduction which is not subject to limits placed on traditional capital losses.

Mr. Shulman continued to state that theft loss deductions may be taken for the year in which the fraud was discovered, except when the investor may have a “reasonable prospect” in recovering the capital loss.

Shulman went on to say that identifying the actual amounts and times of the losses from Ponzi schemes may be “factually difficult” and could take a considerable amount of time to identify the prospects of the lost money.

Shulman, in his testimony to the Senate, continued:

“Some taxpayers have argued that they should be permitted to amend tax returns for years prior to the discovery of the theft to exclude the phantom income and receive a refund of tax in those years The new IRS guidelines do not address that argument.”

From the time that the Madoff scandal was made public, roughly $1 billion in assets have been identified for Madoffs victims. That figure, however, is only a fraction of the $65 billion that Madoff claimed he had possession of. Some have estimated that the Madoff Ponzi Scheme may have cost the IRS as much as $17 billion in lost tax revenues from investors that had earned fictitious profits.

Securities Investor Protection Corp., an organization that backs failed brokerage firms, has already started sending out checks to the victims of the Madoff Ponzi Scheme. Madoffs victims are eligible for up to $500,000 up until July of 09 from the SIPC. Furthermore, Mr. Shulman stated that investors should be aware that they need to deduct the amount they receive from the SIPC from their Madoff investment based “theft loss” deduction.

According to Shulman, the financial statements which were provided to Madoff Ponzi Scheme investors, should be sufficient documentation enough to establish losses for filing tax claims.

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