Long Island Business News
IRS Regs Help Ponzi Scheme Victims Recover Taxes
But the new measures do little for scammed retirees
By Laura Glasser
Published: April 3rd, 2009

Though new Internal Revenue guidelines may soften the blow for Ponzi scheme victims, they do little to help one of the hardest-hit groups: retirees.

Those who gave their life savings to scammers such as Bernard Madoff will only get a fraction of the taxes they paid over the time of their investment, local experts said.

That's because the tax recovery hinges on income made in the last five years or income going forward, both of which retirees have little.

"Unless you have a lot of income going back or going forward, this is just not all that meaningful", said Steve Breitstone, a partner at Meltzer, Lippe, Goldstein & Breitstone in Mineola.

The IRS has told Ponzi scheme victims they can take a theft loss on their 2008 tax return. This was always an option, but until the announcement, accountants were unclear how to classify Ponzi scheme losses.

"Before this we had to put all our Madoff people on extension" said Tim Mulcahy, chairman of the tax department at Holtz Rubenstein Reminick in Melville.

As a theft loss, victims can use 95 percent of their total fraud losses as a deduction in 2008 to lower taxable income. If they lost more than they made last year, they can use the deduction going back up to five years and get a refund for any taxes paid. Victims can also carry the deduction forward up to 20 years.

The IRs is offering Ponzi victims a safe harbor for these theft claims, meaning the government won't challenge the claim, something experts said almost always happened in the past.

For a majority of victims, the new guidelines are welcome relief from the blow of not just losing their entire investment, but paying taxes on fake income for years.

"Short of the government stepping in and giving back dollar for dollar what they lost, this is the best that's available to them," said Mike Greenwald, the partner in charge of Marcum & Kliegman's New York City tax practice. Marcum & Kliegman's corporate headquarters are in Melville.

But, the guidelines also won't help those that invested in Madoff through feeder funds. In this case, the fund gets the deduction and the individual investors don't get anything taxwise, experts said.

For retirees that want to amend tax returns more than five years old, there's a way, albeit a much more complicated way, to recoup losses using older income, Breitstone said. But to go back further, victims would have to forfeit the safe harbor, meaning the IRS can challenge, or even deny, their claim and keep the taxes paid.

"It seems fundamentally unfair that the government should be able to keep all this money people paid in taxes on income that doesn't exist," Breitstone said.

Madoff on March 12 pleaded guilty to 11 charges of fraud related to running a $50 billion Ponzi scheme. He is currently in jail awaiting sentencing.