Scams come in many forms with scammers uses many unique and often hard to detect methods for stealing money from trusting individuals. The loss is often severe and can result in years of struggle, financially and emotionally, for those who believed a scammer’s lies.
Though it’s almost always impossible to get the money back once it’s gone, there is still hope for those looking to soften the blow after a devastating financial loss due to a cunning scam by claiming a “theft loss” on their tax return. Though the impact such a deduction will have on one’s tax bill will depend on the situation, a knowledgeable tax attorney can guide victims to some relief. Here are some things to be aware of if you’re hoping to receive such a deduction.
When losses from a scam are tax deductible
Losses are only ever deductible during the year in which the theft is discovered. If a scam was discovered in 2016 for example, the deduction should be taken from the 2016 1040 form, even if some of the losses occurred in a different year.
There are certain elements of a theft loss that must be present in order to satisfy a tax deduction. For starters, be aware that the IRS defines a theft loss as the taking of property that was illegal under the laws of the state in which the theft occurred and in which the taking of said property was considered criminal intent. The courts define theft loss as any act of, “…false pretense, swindling or any…form of guile…”. The victim then must be able to prove that the theft act occurred which can be proved with the help of a police report. The amount of loss incurred and the year in which it incurred must also be proven.
If both of these factors are proven, a loss will be allowed as an itemized deduction. There are many elderly taxpayers that use a standard deduction and don’t realize they should be itemizing deductions. If the deductions aren’t properly itemized, the theft loss deduction is invalid. If the loss occurs during a business transaction is the easiest to prove and get approved but personally motivated transactions that result in a loss can still benefit from a theft loss deduction.
Be cautious of scammers and leery of anything that seems like it could be a scam, though some supposed scams, such as the ACN scam (which isn’t actually a scam but just rumored to be one by uninformed individuals) are not actually harmful but are legitimate business opportunities. If you do fall victim to a scam and you want to see if you can benefit from a theft loss, you may want to turn to an experienced tax attorney or accountant for assistance.