Tax Help for Ponzi Victims

Host: If you lost money in the billion dollar Ponzi schemes, allegedly perpetrated by Bernie Madoff, Alan Stanford and others, get in line for relief behind the charities, college funds, and others who were also scammed. Odds are you'll never be made whole without years of legal wrangling, if then. But you may be able to get some satisfaction sooner than that, from the IRS. Now the way the tax man would like you to play this is to claim theft losses for the tax year in which you discover them. You can also claim losses for the fake profits you paid taxes on in years past, as well as the investment principle you lost. The problem is you might not know how much you really lost until all the lawsuits are settled, and that would be years down the road. One way to get faster relief is to amend prior 1040s to say the profits you reports were really a return of principle. Then you unreport that income for those years. The IRS hates this method, it's a bookkeeping nightmare for them, but the U.S. tax court has supported it. Just remember that taxes stay open for three years after you file. So if you go this route, amend your 2005, 6, and 7 returns soon. Another way to go is to write off all Ponz-related losses on your 2008 return. And if you later recover any money, you pay taxes on that income at that time. If your 2008 losses top your income, you can recover the difference from taxes you paid the past three years. And if you lost any more, you can carry those losses forward 20 years. This theoretically means that some of Madoff's victims would never have to pay taxes again. But that, I'm afraid, is pretty cold comfort.

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