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Ponzi Scheme CPA discusses the personal side of Investment Fraud | IRS Form 4684 Casualties and Theft

Ponzi Scheme CPA discusses IRS Form 4684, Casualties and Thefts.

Ponzi Schemes generate heartbreaking consequences. But the IRS allows you to re-coup some of that loss through Form 4684, Casualties and Thefts. For a free consult on Ponzi Scheme tax issues call (910) 399-2705.

As a Ponzi Scheme CPA I exploit IRS Form 4684, Casualties and Thefts, for my investment fraud Clients. I’ll present the IRS Ponzi Scheme tax reporting logistics  for personal investors first. S Corporations and Partnerships experience Ponzi Scheme losses too, but I’m only dealing with Form 1040 Folks here. Later I’ll note non tax consequences of Ponzi Scheme victims.

Ponzi Scheme overview; a primer to the IRS Form 4684 instructions.

  • Ponzi Scheme losses aren’t capital losses.
    • So you aren’t limited to $3,000 of loss per year.
  • Investment theft losses aren’t limited by the 10% Adjusted Gross Income or the $100 reduction.
    • But Ponzi Scheme losses are still reported in Schedule A, Itemized Deductions.
  • Ponzi Scheme losses are deductible in the year of discovery.
    • Generally this requires your CPA to amend a prior tax return.
  • You can claim a loss for any fictitious income you may have reported on earlier tax returns.
    • Note how the theft also incurred taxes before discovery.
  • Before you can deduct Ponzi Scheme losses the promoter has to be:
    • indicted on some fraud charge, or
    • be under investigation (usually the FBI) or,
    • have made some confession of guilt or,
    • a Trustee was assigned to freeze assets of a scheme.
  • Ponzi Scheme loss enjoys special IRS treatment only in the year of discovery.
    • Any excess loss is re-characterized as a Net Operating Loss by the IRS.
    • You can carryback or carry forward the Net Operating Loss.
    • Often you must carryback any Net Operating Loss three years, because the original tax return, now amended to claim the Ponzi Scheme losses, missed the deadline for electing not to carryback.

“If you don’t catch the Ponzi Scheme early, and you have excess losses from the Ponzi Scheme for the year of discovery, the excess loss (NOL) gets carried back to at least one year that can’t generate a refund.”
– Gary Bode, Ponzi Scheme CPA

Non Tax Consequences of Ponzi Schemes

In 2014 I worked with a group of Ponzi Scheme victims. The IRS called it affinity fraud because all the victims were in a close knit ethnic group. There were 200 known victims. 198 of these were related to the perpetrator and 2 were close personal friends of the perpetrator. I think Folks didn’t perform due diligence because he was family. The perpetrator was an investments dealer who had multiple complaints against his license before the Ponzi Scheme. I talked with victims who lost their houses and life savings. Folks told about how the pressure of the Ponzi Scheme caused divorces and separations. Some victims felt foolish. The brother of the perpetrator went to kill the perpetrator, couldn’t do it and then committed suicide, perhaps out of shame.

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