New Reporting for Certain Ponzi Scheme Losses

Your Guide to State, Local, Federal, Estate + International Taxation

Financial headlines in the last several years have been filled with stories of investors whose losses have occurred as a result of Ponzi Schemes.  In 2009 the U.S. Securities and Exchange Commission identified 20% of the fraud cases they investigated as Ponzi schemes.  Investment News reported that 9,244 billion in losses from Ponzi schemes were revealed in 2010.  The Bernard Madoff case resulted in losses to investors totaling nearly $65 billion and was the driving force behind the IRS issuance of procedures related to Ponzi-type scheme losses.  The Internal Revenue Service has responded again with a revision to Form 4684.  Form 4684 is used by taxpayers to claim casualties and thefts.
In July of 2013 the IRS issued a draft of Form 4684.  The form now includes Section C which is used to report the theft loss deduction for a Ponzi-type investment scheme using the procedures in Revenue Procedure 2009-20.  Revenue Procedure 2009-20 was issued to provide safe harbors to qualified investors who were victims of Ponzi schemes.  A subsequent Revenue Procedure modified the initial definition of “qualified loss” and “discovery year “included in Revenue Procedure 2009-20.  The safe harbor provisions allow qualified investors meeting certain conditions to claim the loss they have incurred as a theft loss.  This allows the investor the ability to deduct the loss as an ordinary loss rather than a capital loss.  The loss is also not subject to the 2% limit on miscellaneous itemized deductions or the 10% of adjusted gross income limitation on the deduction for casualty and theft losses.  Investors who claimed theft losses due to Ponzi-type investment schemes were previously required to complete a worksheet as published in the Revenue Procedure 2009-20 and attach a statement that was required to be signed by the investor.  These will no longer be required as a result of the revised Form 4684.
If you have or believe you have been the victim of a Ponzi scheme you should consult with your tax advisor to determine the appropriate tax reporting of the loss.

Cheryl Dickerson, CPA