Were You a Ponzi Scheme Investor? Here is What the IRS says…

Bernard (Bernie) Madoff rocked the world of thousands of taxpayers. So, what is the IRS doing to help those who have suffered losses? The code § 165(a) already exists to help those who cannot recuperate losses by establishing a deduction.

How will the IRS deal with the onslaught of potentially thousands of losses in 2008? This is where operation “Safe Harbor” comes into play.

The Ponzi Scheme was fictitious. The numbers were not real. The losses were real. The losses were varied and lack documentation. The scheme relied on variables that created problems in proving exactly how much was lost. How then does the IRS handle these losses? Enter the 95%/75% Safe Harbor ruling.

There are three conditions a loss must meet to benefit from the 95%/75% safety net:

(1) The treatment of a qualified loss as a theft loss;

(2) The tax year in which the theft was discovered; and

(3) The amount of the deduction.

How does the 95%/75% Safe Harbor work?

The technical explanation:

  1. Are you not intending to recover the losses? Then multiply the amount of the investment by 95%.
  2. Are you intending to recover the losses? Then multiply the amount of the investment by 75%. Then subtract any losses recovered.

It makes real sense to utilize the Safe Harbor approach.

This article is a summation of:

http://www.journalofaccountancy.com/web/20091552.htm

See this article for a more definitive explanation on the subject.