Investors who lost money in Bernard Madoff’s $50 billion Ponzi scam may have a better chance of recouping their losses through tax strategies rather than filing lawsuits. Under US tax law, Madoff clients are allowed to take income deductions for losses that occur due to theft. The claim can be filed for the year the loss was discovered, and there is reasonable expectation of recovery.
Madoff has been charged with securities fraud. The 70-year-old investment adviser allegedly confessed to swindling thousands of investors. If convicted, he could face up to 20 years in prison, have his assets forfeited, and be ordered to pay a $5 million fine.
Investors who were direct customers of Madoff can file their loss claims with the Securities Investor Protection Corporation. If they have determined that they are not likely to recover from an SIPC claim, they can file for a theft-loss deduction. Per this provision, Madoff’s victims who are eligible to file an SIPC claim but don’t would get their deduction reduced by the $500,000 cap on SIPC coverage for securities losses. According to the Internal Revenue Service, the loss from 1 occurrence has to be above $100, with the total loss needing to be over 10% of someone’s adjusted gross income for the year when the deduction is claimed.
Another recovery option for Madoff investors is the “claim-of-right” tax refund. This could allow some investors to eliminate income connected to Madoff’s investment advisory business from previous tax returns and allow them to declare the income tax that was paid on these amounts as 2008 tax payments. If the theft loss is greater than the income of the taxpayer from the year when the tax was discovered, it could be carried forward up to 20 years and back three years in order to lower taxable income. Taxpayers may also be able to submit amended returns as far back as three years so an adjustment can be made for income that wasn’t actually earned. The IRS has benefited from Madoff’s alleged Ponzi scam because it was paid taxes on what might be billion of dollars in bogus profits.
According to Shepherd Smith Edwards & Kantas LTD LLP Founder and Investment Fraud Attorney William Shepherd, “For years, our firm has assisted clients to seek millions in tax refunds and loss carry forwards for ‘theft losses.’ This is not a simple process because the IRS regularly opposes such claims. Victims are best served by working with both accounting and legal specialists experienced in the three step process: (1) Provide evidence that other recovery loss alternatives have been exhausted; (2) File the necessary documents to seek casualty-theft losses, including back-up – and later further back-up; and, (3) Engage skilled legal professionals that have the experience to respond to IRS challenges, drive the recovery process, and appeal IRS decisions when necessary. As most citizens know, dealing with the IRS is often treacherous.”
Related Web Resources:
Madoff Clients May Recoup More Losses Through Taxes Than Suits, January 22, 2008
Bernie Madoff Ponzi Scheme: Victim List Grows, The Huffington Post, December 15, 2008
Related Web Resources:
Securities Investor Protection Program