Client Alert:
IRS Ruling to Help Madoff Victims
Anchin continues to monitor the tax benefits available to victims of Madoff and other Ponzi schemes. These tax benefits may be the most significant recovery available. Recent developments from the IRS offer an opportunity to accelerate the recovery process.
The Internal Revenue Service published a Revenue Procedure on Tuesday, March 17th to help victims with the very complicated tax issues surrounding Madoff and other Ponzi schemes. This ruling will allow many taxpayers to recover a portion of the funds lost in the still unfolding Madoff scam.
The procedure creates an optional safe harbor treatment for taxpayers that experienced losses in certain investment arrangements discovered to be criminally fraudulent. The Revenue Procedure brings much needed clarity and guidance to this area and also greatly simplifies the requirements from an administrative point of view, making tax return filing simpler for victims and the processing of returns easier for the IRS.
Some highlights of the new rules:
- 95% of the "qualified investment" is deductible as a theft loss in the year of discovery.
- 75% of the "qualified investment" is deductible if the taxpayer is pursuing recovery from a third party.
- The loss is deductible as a theft loss not subject to the 10% of adjusted gross income limitation normally applied to most theft losses.
- In calculating the "qualified investment," phantom income (income reported but never really earned or paid) is includible in basis.
- Amended returns are not required to be filed to eliminate the phantom income reported in prior years.
- Certain notations on Form 4684, Casualties and Thefts, must be made to the tax return and a simple statement (attached as an Appendix to the IRS Rev Proc) must be attached to the return.
- A carry back of the loss is available if the taxpayer has a net operating loss in the year of inclusion. The loss can go back either 3 or 5 years, if qualified under the recent tax bill, or forward 20 years.
If you have been impacted by the Madoff or another Ponzi scheme, contact your Anchin relationship partner or Clarence Kehoe at 212-840-3456 or Clarence.kehoe@anchin.com. Our tax professionals will evaluate the most beneficial manner to claim your tax refunds. |
