My client was scammed and removed over $200K from her retirement and it was stolen. Can she get a tax write off?

[utah-arizona-taxlady]

Yes, this is a good one.  She is not the smartest.  She had one of those pop ups telling her her computer was hacked...long story short they convinced her to drain all her bank accounts, including hers and her husbands retirement accounts and give them the money.  I read the police report.  All done with codes, and boxes of money, and gold bars and gift cards with "officials" from the bank coming to her home.  Scary.  She had to get a code from the people that came to pick things up....anyway.  Now she has 1099-Rs she has to pay taxes on.  No penalty, they are both over 59 1/2.  So....can the theft be claimed on Schedule A or somewhere?  I know some might have to be reduced.  Anything would help.  I was shocked when I read what happened.  I couldn't believe people could fall for that.  I have been preparing taxes for over 30 years.  This is a first for me.  Not sure what I can do to help.  Please help me!

[BobKamman]

"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."

See how far you can stretch that . . .

[utah-arizona-taxlady]

Yeah, I read that in my research.  I wondered if that could apply.  I mean after all, they saved retirement hoping to get a profit.  😕

[sjrcpa]

For what reason did she think she was turning over all her money?

[utah-arizona-taxlady]

She thought it was someone from the bank and they were trying to protect her money.  She is very honest, very naive.  They told her all her accounts and computer and phones were hacked and they had to protect her money.  They told her it was being used to buy Russian child porn which totally upset her and made her trust them.  They told her she and her husband were all over the dark web (which she really didn't understand but it sounded scary) and the bank couldn't trust the computers for transfers so I guess they convinced her to take all her money out and hand it to them in person.  She said different people came to her house to pick up the cash, gold bars they told her to buy, and gift cards.  She said it was all legit with cameras to film the transfer, codes they each had to have, etc.  She didn't get suspicious until the number she was calling was no longer in service.  

[sjrcpa]

For tax purposes she is screwed, again.

[BobKamman]

Section 165 allows personal casualty losses, 2017-2025, to the extent there are "personal casualty gains."  It's difficult to stretch the IRA withdrawals into that category, but maybe not impossible.  I would not roll over and admit defeat too quickly on this one.  Especially when IRS may be short of auditors by the time the return is filed.  

[sjrcpa]

Good thinking @BobKamman 

[BobKamman]

More like good grasping for straws, @sjrcpa 

Tag lines really should be easily identifiable as not part of the answer.  

[utah-arizona-taxlady]

They have no money, between the 2 of them they only make about $32,000 a year and this year maybe less since he retired in the Spring just before this happened.  They are brutally honest.  I remember one year he was delivering Pizzas as a side job and after filing she called me and said they had to file an amended return because they miscalculated his tips and he had something like $22 more they had to claim.  This was long before they put tips on the W-2.  I am thinking of telling them to reach out for an Offer in Compromise, or maybe to the TaxPayer Advocate.  I don't think they would want me to be sneaky on the tax return, or at least with them knowing.  But I'm honest with my clients and it would be hard to do that without telling them.  My heart is just breaking.  They took everything, their retirement accounts, a savings CD they had, and all the money in their checking and savings.  I am sad she didn't reach out to someone but she said she was embarrassed that they were on the dark web "buying Russian child porn" and didn't want anyone to know...even though they weren't, and she honestly believed the people "helping" her.  😞

[IRonMaN]

That's sad.  For the scumbags that did that to them, I hope they die a slow, miserable death ------------ and I hope that slow miserable death comes real soon.

[utah-arizona-taxlady]

Amen!

[BobKamman]

Computers are like cars.  People shouldn't be allowed to operate them without a license, passing a test to show they know how to avoid injuries. 

But I'm reading this thinking, "I know who they voted for.  The people who took away their casualty loss deductions in order to cut corporate taxes."  So maybe they might benefit from the same people now trying to emasculate IRS.  What's there to lose, if you claim the deduction based on either "business transaction" or "offsetting casualty gain," or both, and wait a year or two to find out if there will be an audit?  It has been a while, but I can remember telling clients with unusual returns that "IRS will have to believe this because it's too outrageous for anyone to make up."  

[TaxGuyBill]

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@IRonMaN wrote:

 I hope they die a slow, miserable death ------------ and I hope that slow miserable death comes real soon.

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You are hoping they become ProSeries users?  🤣

[IRonMaN]

That's a fate worse than death 😬

[TAXMANPAT]

Clearly america is great again