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• W22524683 abstract "EXECUTIVE SUMMARY * More than two years after the revelation of Bernard Madoff's massive fraud, Ponzi schemes continue to come to light. Some have targeted investors of modest means, including workers' retirement accounts. * The IRS has provided guidance and a safe harbor election that may prove beneficial for victims of Ponzi losses. An investment account is considered a transaction entered into for profit and therefore subject to deduction without regard to the $100 floor and threshold of 10% of adjusted gross income (AGI) applicable to losses of personal-use property. Nor is it subject to the 2%-of-AGI threshold for miscellaneous itemized deductions. * The guidance also provided relief for the timing and amount of loss recognition with respect to when the Ponzi loss was discovered and to reasonable certainty as to whether any reimbursement will be received by the taxpayer. * However, these beneficial provisions apply only to taxpayers that invested directly in the fraudulent scheme, which may put such relief beyond the reach of many retirement fund investors. * Tax planning for qualifying investors will include managing carrybacks and carryforwards of excess deductions from a Ponzi loss, relative to income and other deductions in past and future tax years. * Planning must also take into account states' treatment of Ponzi losses for personal income taxes, which may differ from federal treatment in both current-year deduction of itemized expenses and length and conditions of carryover periods. ********** Ponzi schemes continue to come to light regularly. After 2008, when Bernard Madoff's $65 billion Ponzi scheme was exposed, the SEC made comprehensive reforms to better detect fraud within the 11,000 regulated investment advisers and 8,000 mutual funds that it oversees, according to the SEC's description of those reforms (tinyurl.com/2fu6eog). As a result of its increased enforcement efforts, in 2009 the SEC initiated 60 enforcement actions against alleged Ponzi schemes. They included Houston financier Robert Allen Stanford's alleged $8 billion ruse. In each of these cases, besides their monetary losses, alleged victims face tax implications that CPAs can help untangle. This article describes tax guidance regarding the treatment of Ponzi-scheme losses from both federal and state tax perspectives. In 2009 the IRS issued Revenue Ruling 2009-9 and Revenue Procedure 2009-20. This guidance allowed favorable tax treatment and safe harbor elections for direct investors (see Deducting Losses for Defrauded Investors, The Tax Adviser, July 2009, page 442). Unfortunately, the favorable tax treatment applies only to qualified investors (defined below). Indirect investors that invested through IRAs and other tax deferred accounts will realize tax benefits only in certain cases, and the deduction may be deferred for years. SEC-INVESTIGATED PONZI SCHEMES An examination of SEC press releases between Jan. 1, 2009, and July 31, 2010, found 31 announcements of complaints filed against alleged Ponzi-scheme frauds. The size of the alleged frauds ranged from $800,000 to $8 billion. The number of investors allegedly defrauded in each scheme ranged from 12 to more than 800, with an average estimated potential loss of $867,522 per investor. Geographically, Florida and California tied for first place in the number of alleged Ponzi-scheme frauds with six each, followed by New York with five and Colorado with two. Exhibit 1 lists the 10 largest alleged Ponzischeme frauds between Jan. 1, 2009, and July 31, 2010, based on SEC complaints. In reviewing the alleged frauds we found a large number that targeted retirees, including one that was brazen enough to target federal law enforcement retirees and another targeting approximately 80 retired Los Angeles Metro bus drivers. Clearly, the Madoff fraud is not the end of the Ponzischeme story, and retirement funds are a rich target for those perpetrating these frauds. …" @default.
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• W22524683 date "2011-02-01" @default.
• W22524683 modified "2023-09-24" @default.
• W22524683 title "Ponzi-Scheme Losses: Indirect Investor and State Tax Issues: IRS Guidance Provides Little Tax Benefit for Thefts That Hit Retirement Funds" @default.
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