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Gary Bode, CPA is a Master's Degreed, nation wide accountant offering tax and business services. Member of AICPA and NCACPA. Our virtual office provides excellent service to long distance and international clients. Call (910) 399-2705 for a free phone consult.

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I had a 1099-C for about $135,000. My husband didn't have any withholding on Social Security. His employer couldn't withhold due to incompetence. I felt utter dread wash over me. Memories of owing the IRS before were constantly on my mind. I called a local CPA. Besides being clueless, he wanted to charge me for every question I had about insolvency. I looked on line and found little hope of the countless stories of permanently disabled people like myself getting their student loans forgiven only to be asked to pay taxes on it as if it were income.
Somewhere, somehow, I find an article by Gary Bode. I bookmarked it for when it's time to do the actual taxes. With his excellent help in how to do all of this out of a virtual office I get my part of the work done. My questions got answered, for free. I give a retainer, do what I said I did and wait. I hear from Gary. I go into shock! How can this be? Not only do I not owe on the 135,000....Gary itemizes and after paying what was almost nothing in taxes we get $950.00 back! No more hubby doing the taxes online! I will use Gary Bode as long as he will agree to work with me!
It was so easy, no worries, but professional and top notch. I know I have thanked you Gary but I am so grateful. Thank you ever so much again!

Carla Bray

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Investment Fraud CPA discusses Form 4684 Part II | Ponzi Scheme | Turning casualty loss into ordinary loss

ponzi scheme CPA gives tips on Form 4684 Part II: a Wilmington NC CPA with a virtual office

Gary Bode CPA: I’m sorry about your loss, but perhaps we can help you turn lemons into lemonade. For a free phone consult please call (910) 399-2705.

Ponzi Schemes are just one variety of investment fraud. The IRS defines them as theft loss. Two potential tax treatments exist for deducting theft loss. You’ll read below why using Form 4684 is better, if your loss qualifies.

What is Investment Fraud?

  • You must invest expecting to turn a profit.
  • The investment decreases in value through criminal fraud or embezzlement, typically by your investment professional.

How much can I Recoup of my Investment Fraud or Ponzi Scheme Loss?

It depends. Here’s a simple example. If you’re in a 25% marginal tax rate, every $1000 of deduction allowed generates $250 of tax refunds or savings. And, of course, 25% is better than nothing. I don’t hear many folks recouping Ponzi scheme losses through the Court system. So, unfortunately, a tax deduction is as good as it gets . But at least you can turn it into an ordinary loss and avoid the usual limitations of Schedule A.

Two Methods to Deduct Investment fraud and/or Ponzi Scheme Losses

Schedule A, Casualty Loss: Line 20 (for 2012): here your loss is subject to

  • A$100 per incident decrease.
  • A 10% threshold based on your Adjusted Gross Income (AGI).
  • All categories on Schedule A have to exceed your Standard Deduction.

So, if you have $100,000 of AGI, the first $10,100 of your loss (10% x $100K + $100) can’t be deducted even you itemize on Schedule A. If your total itemized deductions are $2,000 less than the standard deduction on Schedule A, for example, the first $12,100 of your theft loss doesn’t generate deductions. Investment fraud CPAs hate these limitations on Ponzi scheme cases.

Form 4684 Part II to the Rescue

If your investment fraud or Ponzi Scheme loss qualifies as theft loss, the entire loss (subject to further IRS limitations described below) generates a dollar for dollar deduction of ordinary loss. Ordinary loss offsets any income. Whever possible use Form 4684 Part II for Ponzi scheme losses. I’ve seen folks who lost thousands of dollars by not using this route.

Do you need a Form 4684 CPA?

Maybe not. Form 4684 part II isn’t rocket science. And the IRS does a nice job on explaining things. But the first pass at any esoteric tax process is daunting:

  • Safe Harbor rules: how much can you claim while the exact amount of loss is unknown? 75% or 95% depending on your reimbursement expectations.
  • When can you claim the loss? Sometimes you must amend past tax returns. Generally you claim the loss in the year it was discovered and/or criminal charges are expected against your investment professional.
  • Carry Forwards: what if you can’t use all the deduction on your tax return? Carry it forward on later returns.
  • What if I’m partially reimbursed in the future? This becomes income if you’ve already deducted it in the past.
  • What other forms do I need? Form 4684 just attaches to your tax return. The IRS requires another Appendix. Prudence dictates submitting a well crafted explanation with supporting documents.

The number one question I’m asked about investment fraud losses?

Well, folks who’ve lost money in the stock market want to write off more than the $3000 annual capital loss limit. There’s no way to do that, sorry. This post doesn’t deal with capital loss.

I’m a CPA with a virtual office to accommodate long distance clients and provide greater convenience for local Wilmington NC folks. If you don’t have a local Form 4684 CPA, or just like what you’re reading, please consider calling us for a free phone consult at (910) 399-2705.


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