Victims of financial scams are facing a double blow: not only have they lost significant sums from their retirement accounts, but the Internal Revenue Service (IRS) now treats this stolen money as taxable income. Previously protected by the Theft Loss Deduction, victims are now left to grapple with substantial tax bills following changes in tax legislation. A senior citizen in metro Atlanta, who had $280,000 siphoned off from his investment accounts, faces an additional potential tax liability of $60,000. The scam was perpetrated by someone posing as a federal agent, and now the IRS considers the stolen funds as earned income, further complicating the victim's financial situation.

The Impact of Legislative Changes on Victims

The removal of the Theft Loss Deduction in the 2017 Tax Cuts and Jobs Act has left many victims vulnerable to unexpected tax liabilities. This provision previously allowed individuals to claim deductions for losses due to theft, thereby avoiding unnecessary tax burdens. Now, without this protection, victims must report stolen funds as income, leading to higher tax obligations. For instance, a senior citizen in metro Atlanta is facing a potential tax bill of $60,000 on top of the $280,000 already lost. The emotional and financial toll on these individuals cannot be overstated, especially when considering that they never actually received the stolen funds.

Before the legislative change, victims could list theft losses on their tax returns, ensuring they did not owe taxes on the stolen amounts. However, the new law restricts the deduction to losses related to federally declared disasters, leaving victims of other types of theft unprotected. Christina Wease, who runs a low-income tax clinic at Michigan State University School of Law, has encountered several clients facing similar predicaments. She emphasizes that Congress may not have fully understood the repercussions of this change, hoping it will be addressed soon. The current situation leaves victims struggling to prove that they never received the funds, while legally, the IRS must collect the tax debt.

Potential Solutions and Advocacy Efforts

Advocates and legal experts are pushing for reforms to alleviate the burden on scam victims. Various programs exist to reduce or manage tax debts, but they can be complex and limited in scope. Many provisions of the 2017 tax law are set to expire this year, presenting an opportunity for lawmakers to revisit and potentially restore the theft loss deduction. Last year, a bill proposed by Democrats in the House aimed to reinstate this crucial protection. If passed, it would provide much-needed relief to those affected by scams.

The Senate Aging Committee’s 2024 report highlighted the plight of fraud victims who can no longer deduct theft losses and are often obligated to pay taxes on stolen money. Wease and other advocates argue that Congress should recognize the unintended consequences of the 2017 tax overhaul and take corrective action. Victims like the senior citizen in metro Atlanta find themselves in a precarious position, where proving non-receipt of stolen funds is challenging. While some payment plans and debt reduction programs exist, they offer limited assistance. The hope remains that legislators will address this issue promptly, providing much-needed support to those already suffering from financial scams.