Tax breaks for Ponzi scheme victims

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Story Published: Mar 24, 2009 at 5:08 PM MDT

Story Updated: Mar 24, 2009 at 5:36 PM MDT

By Mary Sturgill

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IDAHO FALLS - The people who invested in Ponzi Schemes like Darren Palmer's may not get their money back, but they will get some tax breaks. I talked to local tax experts at Cooper Norman to find out what kind of breaks they can expect.
This month the IRS issued guidelines that will allow Ponzi scheme victims to deduct losses to theft in the 2008 tax year and recover any taxes paid on non-existent income. Michael Pryor with Cooper Norman says, "You know we're talking locally 50 to 60 million and on a national scale it starts with a "B" as in billions. It's a big deal."
Those tax refunds could help them recover 35 to 50 percent of their losses. Pryor explains, "Lets say I invest 100 thousand dollars. I can take 100 thousand as a loss but it's only gonna offset my income situation depending on what bracket I am in. 35% against my tax."
Victims of Ponzi schemes may have three tax refund options. Theft Loss, Capital Return and Phantom Income. For Theft Loss, you can file a form that says you had money stolen from you in a Ponzi scheme.
Pryor explains capital return, "capital return, you can actually go back and maybe amend a return and say that this was actually not income but it was a return of capital."
And Phantom Income, well this is income taxes paid by Ponzi investors on what turns out to be fake profits, or "phantom" income. It may be recovered as theft losses or under certain circumstances by re-characterizing the income as non-existent. But that depends on where you are in litigation.
Pryor says, "So it's real situational to the individual. The IRS is changing the rules to try to make it a little more lenient to give them options."
So what should you do?
"Every person is different. Every situation is different but if we sit down and discuss specific and make a plan, then that will be the best thing to do." Pryor explains.

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