Business Fraud

[smallbusinessadvantage]

Client is a doctor, was contacted by who said they were with the DOJ working with the DEA.  Demanded money if he didn't want to be part of the criminal proceedings.  They had a lot of info on him, such as old vin#'s, his DEA account number, doctor license #, etc....  FBI finally told him it was a scam and had never seen anything so sufficicated and looking like it really came from the Federal Government D(DOJ, DEA,etc.. forms and letters)being used.  Long story short, he lost maybe $50 to $60k.  Is this going to be a deductible loss for his S Corp K1 to flow to the 1040.  

[BobKamman]

One man's fraud is another man's bribery.  What was he so worried about, that he paid money to these "sophisticated" people with information in the public domain (and DEA is part of DOJ, they don't need to "work together")?  If you bribe a cop to stay out of jail, it's not deductible.  If you bribe someone pretending to be a cop, I don't think that makes a difference to IRS.  Just make sure the auditors are legitimate when they show up.  

[BobKamman]

On the other hand, if we had the long story instead of the short version, maybe what happened is that the guys with the pdf of the DEA letterhead just proposed fines and penalties because they said they found problems with his data.  And he was so busy writing prescriptions for painkillers that he decided to pay them rather than take the time to comply.  If real fines and penalties are not deductible, should fake ones be allowed?  

[smallbusinessadvantage]

Actually the guy was just out of med school, very green/wet behind the ears.  They didn't really say they were going to prosecute him, but if he would help them by giving them some funds to help their investigation it would be nice of him.  They said they would give it back and they did.  So the first two draws he gave them and they gave them back in full within weeks apart.  I believe they were between $5k and $10k to begin with.  

Then they asked for a 3rd then a 4th and maybe there was a 5th, before he became concerned because those 2 or 3 hadn't been paid back as quickly as the others.  He was still talking to them and asking when he would get his money back as the other 2 earlier.   They kept giving him the run around and asked for another payment, but then he called the FBI about the situation and asked them to come to their offices to discuss the matter and clear his name.  They said they didn't know anything about him or the DOJ targeting him for a drug case.  So they had him come in for a formal in person visit at the local field office.  That is when all of it became evident that it was a scam and was told they haven't ever seen one so well done, that, that was the best they had ever encountered yet.  

So he lost around $50 to 60K in 2024.  So if this is a potential business loss that can be counted as an expense, we would have to do an amended return.  Which is ok since we have still 2 years to do so.  What sucks for him is it caused him to either count those as owner draws or an expense, which hurt his equity to make him have a shareholder loan to be repaid back ASAP.  If this wouldn't have happened he would of had a positive equity and not worried about a negative equity or shareholder loan that could cause capital gains/interest payments.  

[Terry53029]

Theft losses

A theft is the taking and removal of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and must have been done with criminal intent. The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero. For tax years 2018 through 2025, individual taxpayers with theft losses are allowed a deduction if the loss is due to theft related to a transaction entered into for profit.

Fraud is theft, and if it ocurred with your clients S-Corp it would be deductable. Be sure to keep good records to support the loss. Research pub 584-B, and instructions for form 4684 section B.

[George4Tacks]

When will this be on Netflix? 

[smallbusinessadvantage]

I love it I may have him contact them for a contract to do a series on it. Lol