Are You a Scam Victim? You Might Get Hit Again — by Taxes

“A lot of victims do not come forward or talk to organizations like ours because they’re too embarrassed,” he says. “Many of them have already lost their life savings, and now they have a tax bill that would require them to sell their house to pay it or use the remainder of their savings. It’s devastating.”

The Senate report noted other repercussions from victims’ needing to declare those losses as income: It “may impact Medicare costs and eligibility for public benefits, such as Medicaid, subsidized housing, and Supplemental Nutrition Assistance Program (SNAP) benefits.” Some scam victims who withdrew retirement funds were forced to pay up to $419 more per month for their Medicare Part B premiums, according to the Senate committee. 

Legislative solutions

In March 2024, AARP wrote to a group of U.S. lawmakers to support the bipartisan Casualty Loss Deduction Restoration Act. The legislation would not only reinstate the casualty loss deduction, but it would allow people who paid taxes on theft losses between 2018 and 2025 to retroactively claim the deduction, with a cap of $50,000. The bill has been introduced in both the House (H.R. 4539) and the Senate (S. 2236).

Two other bills have similar goals. The Tax Relief for Victims of Crimes, Scams and Disasters Act (H.R. 6938, S. 2236)would reinstate the deduction and allow people to apply retroactively, without a cap. Another bill in the House, the Protecting Homeowners from Disaster Act of 2023 (H.R. 318), would restore the deduction without making it retroactive. Neither bill is bipartisan; both are sponsored by Democrats.

Hearings have not been scheduled for the bills, but they will likely be discussed as Congress develops a new tax package in 2025, reports Clark Flynt-Barr, AARP’s government affairs director for financial security. “Everything in the 2017 bill will expire in 2025, so they’ll have to modify things,” she says. “There’s an opportunity here.”

Can you fight back?

If you’ve been scammed and you’re facing a large tax bill, your options are limited. Here are some steps to take.

Know the exceptions. Victims of Ponzi schemes are still allowed to use the deduction, says Flynt-Barr. You can also claim the deduction if you were scammed while conducting business. “If it’s clear from the record that this transaction where you lost money was motivated by business or financial interests, then you actually are allowed the deduction,” Anderle says. “It’s all about intent. If you were trying to get a service for your business, or you were trying to enter into a legitimate financial contract, and that was your sole, primary motivation, then that loss will be allowed.”

The business exception is not a slam dunk, however. The exceptions are “highly technical and may be difficult to decipher, even for tax professionals, let alone most taxpayers,” the Senate report notes.

File an Offer in Compromise (OIC). An OIC is an IRS relief option that lets you settle your tax debt for less than the full amount. Scam victims with financial hardships can use this to reduce their tax liabilities, but the process is complicated and time-consuming, and the success rate is low. LAW, for example, had a case where an octogenarian couple lost $1 million in a scam. The IRS did not accept their OIC. Instead, it told them to sell their home, which was one of their few remaining assets. “We often end up having to appeal,” says Anderle.

Seek legal assistance. Most people are afraid to fight the IRS on their own, with good reason. It’s like a novice David battling a bureaucratic Goliath — and the OIC program is “complex, burdensome, and harsh,” according to the Senate committee report, with “stringent qualification requirements.”

Even attorneys can find it challenging. The process typically involves the submission of 50 to 100 pages of documents, Nathaniel Puffer, director of the New Mexico Legal Aid Low Income Taxpayer Clinic, told the Senate committee. If you can’t afford a lawyer, look for a low-income law clinic in your area. The IRS has instructions for the OIC process on its website.

Write to lawmakers. If you want the theft deduction restored, share your thoughts with your U.S. senator or representative in the House. “Members of Congress care a lot about what their constituents think,” says Flynt-Barr. “When I worked on the Hill, that was the first question we’d get if we were considering sponsoring a bill: Have we heard about this from our constituents?”

She notes that informing lawmakers will improve the odds that the theft deduction is included in a 2025 tax bill. The deduction is a niche topic when it comes to tax issues, so many lawmakers may be ignorant of the problem, she adds. “They may not know if you don’t tell them.”