Tuesday, March 17, 2009

Madoff Tax "Theft Loss" - A full accounting or at least questions

With respect, sensitivity and feeling for the Madoff victims but correct me if I'm wrong or off base ok?

IRS decides and announces "theft loss" deduction applies for past 5 years and Senator Schumer is trying to get that extended to 13; not the less favorable "recoupment" of previous taxes paid upon what we now call fraudulent income; dividends and or capital gains.

From Market Watch: Under the IRS guidelines, victims will be able to take a deduction equal to 95% of the amount they invested, plus any investment income they believed they were earning, minus any expected recovery from the government or private insurance.

From AP: If deductions claimed this year result in a "net operating loss" for taxpayers, meaning they would owe no taxes, they can apply excess deductions to prior years, getting a refund for taxes already paid. They can also use the deductions in future years to lower their tax burden, under the guidelines.

By some estimates, the IRS could be out as much as $17 billion in lost tax revenue from refunds to investors who earned fictitious profits in the Madoff scheme.

  1. The Madoff victims, of his ponzi scheme are perhaps innocent victims, but make no mistake, they are not the first.
  2. Question - can victims of all past ponzi schemes file amended returns?
  3. Question - to the extent the IRS ruled that principal losses are deductible does it extend only to the taxable Madoff accounts involved to the exclusion of the IRA's, Pension plans, and Non profits, Schools, Colleges, University, foundation and endowment accounts?
  4. UBTI (IRS-speak for Unrelated Business Taxable Income) - to what extent does a tax exempt entity. non-profit cross over reporting and tax filing liability in the past compared to the instant IRS recovery.
  5. One last Question for now - if a Madoff investor took or received cash for dividends or gains how does that square, if at all, with the IRS rules?
    1. Does the investor need to reconcile cash invested, cash received, taxes paid on same, in comparison to the IRS new Theft loss deductions?

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