|Ponzi Schemes — Deducting Investor Losses
New IRS guidance in response to the widely-publicized Madoff scandal.
May 14, 2009
Rev. Rul. 2009-9; Rev. Proc. 2009-20
In response to the highly-publicized Madoff scandal and other recent Ponzi schemes that have surfaced, the IRS has issued guidance on how to handle the resulting investor losses. First, Rev. Rul. 2009-9 states how these losses are treated for tax purposes. Next, Rev. Proc. 2009-20 provides a safe harbor method for claiming and computing the losses. In Rev. Rul. 2009-9, the IRS provides a fact pattern describing how a Ponzi scheme works, which includes the promoter issuing fictitious investment activity and income statements to investors and paying out purported income or principal, at least in part, from amounts invested by others into the fraudulent investment arrangement.
The following are the key points with regard to the proper tax treatment of investment losses from a Ponzi-type investment scheme:
Optional safe harbors for claiming and computing losses. To help determine when, or if, a deductible theft loss has occurred and how much to claim, the IRS has provided the following safe harbor rules that taxpayers can follow if they choose.
Tax preparers with clients caught up in one of these Ponzi schemes or similar fraudulent investment schemes should consult these IRS rulings for additional details on how to determine and claim tax losses that result.
— From the Quickfinder Tax Tips Newsletter from the Tax & Accounting business of Thomson Reuters, May 2009. To subscribe to this informative monthly newsletter, visit quickfinder.thomson.com or click here. To learn more about Gear Up, visit trainingcpe.thomson.com/GearUp.