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IRS gives new guidance for scam victims to deduct theft loss

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The Internal Revenue Service has issued a chief counsel memorandum that offers guidance on who is eligible to take a theft loss deduction for scams. The memorandum, No. 202511015, released March 25, 2025, addresses a number of common scenarios and analyzes the deductibility of each. 

This is important because under the Tax Cuts and Jobs Act, personal casualty losses are limited to losses incurred in a disaster zone, according to James Creech, a director at the tax advocacy and controversy practice of Top 10 Firm Baker Tilly. 

“These scams are just becoming so prevalent and there are so many variations,” he said. “And the scammers are sophisticated. Foreign organized crime is reaching in and targeting U.S. taxpayers, and the losses can be extremely damaging. But because they’re able to cast a wide net, there are a lot of taxpayers who had smaller losses as well.”

A taxpayer who suffers a smaller loss might not have the sophistication to know they could be entitled to take a theft loss deduction, or the facts and circumstances that may make it hard to fit into the Code Section 165(c)(2) profit motive exception to the TCJA limitations.

Over the past few years, Creech has been working with a number of taxpayers who suffered large, catastrophic losses where it made sense to get professional advice. 

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“The problem is that, especially when the money is being stolen out of retirement funds, there’s a Form 1099-R that comes out of the brokerage,” he explained. “You’ve got a lifetime of income that gets accelerated into one year, so you look like a million-dollar earner on paper but have no money. In that circumstance, it makes sense to find somebody like myself or another tax professional who could look at the facts and examine whether there was a profit motive in this loss.”

If the taxpayer is a retired schoolteacher or office worker, they might have lost $100,000 out of their 401(k) and may not even know about the loss, Creech noted.

“And they may not have the money to hire someone to prepare a memo on this as to what their intent was,” he added. “This guidance from the IRS changes that. Now there’s an ability for solo and small CPA firms to look at the losses that happen to their clients, especially losses that are on the more modest scale, and take a deduction consistent with the guidance. So it’s very helpful from a tax equity standpoint.”

“A lot of these scams start with an impersonation of a government agent or a bank officer saying your account is in jeopardy,” Creech said. “It’s either been hacked or the criminals see a fake account using your name. ‘We need you to move your assets to someplace safe, and once you’ve moved them we’ll return them to you. We’re really trying to protect your money.'”

The IRS guidance for this is the first Creech has seen address the motive head on: “When people are moving their money to keep it safe, the motive of doing that is to preserve future profits of the income, so there could be a profit motive for trying to keep your assets safe. And asset preservation has a profit motive. That portion of the guidance was enormously helpful, because it gives support for people that are the victims of those theft losses to take the deduction. It’s heartbreaking to see non-wealthy people get scammed like that — they’ve lost their money and they owe a huge tax bill. At least there’s a portion of them that deduct the loss.”

“But it’s just as heartbreaking to see those who lost their money in a scam that was not entered into for profit, such as the fake romance or the fake medical condition,” he noted. “For example, ‘I really love you and want to come to the U.S. so we can be together, but I really need some money to settle up some debts I have here.’ Or ‘I need medical treatment in order to live, but once I get treated I’ll come and we can be together.’ It’s still painful for the victims of the scam, but in these cases they don’t get the deduction because there was no profit motive.”

The sole silver lining for many is the withholding, according to Creech: “If there’s 24% stuck in withholding and if you can claim the loss deduction and get the withholding back, it makes an incredible difference. Sometimes that’s the only cash these people will have to live on for the rest of their life, because they lost everything else.”

How does one avoid becoming a victim? Make sure you have a “trusted contact.” Every brokerage account has a place on its application to name a trusted contact, noted Creech: “They are supposed to reach out to you, and say, ‘Hey James, your dad is about to wire $300,000 to China — is this legitimate?”

This allows the trusted contract to veto the transaction and check out what’s happening. 

“I’ve seen so many of these scams where a trusted contact would have nipped it in the bud,” said Creech. “But because the victim didn’t complete the trusted contact section on the application, they’re out of luck. A trusted contact is a circuit breaker that allows the contact to pause the transaction until they can check the legitimacy of it.”

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Accounting

IRS sets new initiative with banks to uncover fraud

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The Internal Revenue Service’s Criminal Investigation unit has embarked on a new initiative for engaging with financial institutions as it makes greater use of banking data to uncover tax and financial fraud. 

IRS-CI released FY24 Bank Secrecy Act metrics Friday, demonstrating how it uses BSA data to investigate financial crimes. During fiscal years 2022 through 2024, 87.3% of IRS-CI’s criminal investigations recommended for prosecution had a primary subject with a related BSA filing, and adjudicated cases led to a 97.3% conviction rate, with defendants receiving average prison sentences of 37 months. IRS-CI also leveraged BSA data to identify $21.1 billion in fraud linked to tax and financial crimes, seize $8.2 billion in assets tied to criminal activity, and obtain $1.4 billion in restitution for crime victims.

Under the BSA, which Congress passed in 1970, financial institutions use suspicious activity reports to notify the federal government when they see instances of potential money laundering or tax evasion. The SARs data is used by agencies like IRS-CI to probe money laundering and related financial crimes.

A new IRS-CI initiative known as CI-FIRST (Feedback in Response to Strategic Threats) aims to establish ongoing engagement with financial institutions. They will receive quantifiable results from IRS-CI on how the agency uses suspicious activity reports to investigate federal crimes. 

“Public-private partnerships thrive when everyone mutually benefits, and to enhance our partnership with the financial industry, we plan to launch CI-FIRST which will promote information-sharing, streamline processes and demonstrate how valuable BSA data is to criminal investigations,” said IRS-CI Chief Guy Ficco in a statement.

As part of the CI-FIRST program, IRS-CI plans to streamline subpoena requests and share pointers with financial institutions on what to include in suspicious activity reports to maximize their impact. The program will address what’s working and what can be improved, offering continuous lines of communication between partners. IRS-CI headquarters will work with larger financial institutions that have a national and international presence, while its field office personnel will work with regional and community banks and credit unions.

IRS-CI special agents ran an average of 966,900 searches each year against currency transaction reports during the last three fiscal years. Close to 1,600 cases were opened in FY24 with at least one currency transaction report on the primary subject. The data also shows that 67.4% of cases opened by IRS-CI had a subject with one or more currency transaction reports below $40,000, with 50% of currency transaction reports involving amounts less than $22,230.

BSA data has also proven to be effective in helping IRS-CI combat narcotics trafficking and pandemic-era tax fraud. Since FY20, IRS-CI used BSA data to initiate nearly 1,300 investigations with ties to fentanyl and investigate alleged employee retention credit fraud totaling $5.5 billion.

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How tax departments can avoid 2017’s mistakes ahead of the 2025 TCJA sunset

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As the expiration of key Tax Cuts and Jobs Act provisions looms, tax professionals are preparing for what could be another period of upheaval.

In 2017, when the TCJA was first enacted, tax departments struggled to keep pace with new regulations and guidance. According to our recent Bloomberg Tax survey of 434 tax professionals, 92% of tax professionals working in tax at the time reported that the TCJA’s implementation was moderately to highly disruptive, and 60% said it took a year or more to fully implement the changes. 

The coming year could bring more of the same. Eight in 10 respondents are moderately or very concerned about the potential impact of these changes. Yet many rely on outdated, manual processes that make adjusting quickly to major legislative changes difficult.

With the benefit of hindsight, tax professionals have a unique opportunity to apply the lessons of 2017 and invest in automation now to avoid repeating the same costly mistakes.

Manual processes still dominate tax departments

One of the most striking findings from our survey is that many tax professionals continue to rely on manual workflows despite the increasing complexity of tax compliance. Seventy-six percent of respondents said they still use Excel for tax calculations, and 63% manually gather data from enterprise risk management and general ledger systems to perform tax calculations.

These outdated processes create inefficiencies and make it harder for tax teams to respond quickly to legislative changes.

In its time, the TCJA was the most sweeping tax code overhaul in decades. It required tax departments to significantly modify or even replace their workpapers to reflect the changes. 

While 62% of survey respondents believe they can update their existing workpapers without major difficulty, one in four anticipate significant challenges, and 10% will need to create entirely new workpapers.

This manual burden could put firms at a disadvantage when deadlines are tight and compliance requirements shift rapidly.

Scenario modeling is challenging yet critical

When big changes are on the horizon, running multiple tax planning scenarios helps organizations make decisions and manage risk. Automated tax solutions streamline this process by allowing tax teams to evaluate different legislative outcomes and come up with strategies to address them.

Firms that lack automation in their tax workflows may have a tough time keeping up with the pace of change — especially if Congress waits until the eleventh hour to pass legislation, as was the case in 2017.

Eighty-eight percent of respondents reported it is moderately or very difficult to conduct scenario modeling for TCJA changes, and only half have started the process. One respondent noted, “We need as much lead time as possible to make changes to our models, and significant changes take even more time to incorporate. Running multiple scenarios is a very manual and difficult process.”

Quantifying the cost of inaction

Failing to invest in automation before a substantial tax law change can be a costly mistake.

Among respondents, 71% who experienced the enactment of TCJA in 2017 reported wishing they had invested earlier in tax technology to better manage the complexity of compliance updates. Manual processes not only slow response times but also drive costs, as nearly 40% of respondents anticipate a $100,000 or higher increase in consulting budgets if significant TCJA-related changes occur. 

By leveraging tax automation tools and centralized tax-focused software, firms can optimize how they engage with external consultants. Automation allows tax departments to take ownership of routine processes, such as calculations and compliance adjustments, reducing reliance on consultants for these tasks. Instead, consultants can be utilized more effectively on high-impact projects that drive strategic value, such as tax planning, risk management or navigating complex regulatory changes. This shift enables firms to streamline compliance while ensuring external expertise is directed toward creating lasting organizational benefits.

Preparation now means greater confidence going into 2026

The data is clear: firms investing in automation today will be better positioned to handle the upcoming tax changes confidently. Here’s how to get ahead:

  • Integrate tax technology. Replace manual calculations in Excel with automated tax workpapers that integrate with source data and automate data gathering and calculation processes.
  • Adopt scenario modeling tools. Invest in software that allows for real-time legislative modeling so you can analyze multiple potential outcomes before changes take effect.
  • Reduce reliance on external consultants. Implement in-house tax software to keep control over your data, reduce consulting budgets and respond quickly to regulatory shifts.

With less than a year until TCJA provisions are set to expire, the time to act is now. Taking proactive steps to automate and modernize your workflows will put you in a far stronger position than companies that wait until the last minute. 

Major tax law changes can be disruptive, but with the right technology, you don’t have to relive the turmoil of 2017. Embrace tax-focused automation to remain agile, efficient and ready to navigate whatever changes come next.

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Accounting

SEC stops defense of climate disclosure rule

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The Securities and Exchange Commission voted to end its legal defense of the climate-related disclosure rule it approved last year under the Biden administration.

The climate disclosure rule was facing numerous lawsuits from business groups and a temporary stay imposed by a court, the SEC had already paused it last April after narrowly approving a watered-down rule last March. The former SEC chairman, Gary Gensler, who had pushed for the rule, stepped down in January and acting chairman, Mark Uyeda, who had voted against the rule, announced in February that he was directing the SEC staff to ask a federal appeals court not to schedule the case for argument. He cited a recent presidential memorandum from the Trump administration imposing a regulatory freeze, and he effectively paused the litigation. The vote on Thursday effectively suspends the rule.

“The goal of today’s Commission action and notification to the court is to cease the Commission’s involvement in the defense of the costly and unnecessarily intrusive climate change disclosure rules,” Uyeda said in a statement Thursday.

The SEC noted that states and private parties have challenged the rules, and the litigation was consolidated in the Eighth Circuit Court of Appals. SEC staff sent a letter to the court stating that the Commission was withdrawing its defense of the rules and that Commission counsel are no longer authorized to advance the arguments in the brief the Commission had filed. The letter stated that the SEC yields any oral argument time back to the court.

One of the SEC commissioners blasted the move and pointed to the arduous, years-long process of crafting the climate rule. “By way of politics, the current Commission would like to dismantle that rule. And they would like to do so unlawfully,” said SEC commissioner Caroline Crenshaw in a statement Thursday. “The Administrative Procedure Act governs the process by which we make rules. The APA prescribes a careful, considered framework that applies both to the promulgation of new rules and the rescission of existing ones. There are no backdoors or shortcuts. But that is exactly what the Commission attempts today. By its letter, we are apparently letting the Climate-Related Disclosures Rule stand but are withdrawing from its defense in court. This leaves other parties, including the court, in a strange and perhaps untenable situation. In effect, the majority of the Commission is crossing their fingers and rooting for the demise of this rule, while they eat popcorn on the sidelines.”

Environmental groups were critical of the SEC’s vote. “Climate change is a growing financial risk, and ending the SEC’s defense of its own climate disclosure rule is a dangerous retreat from investor protection,” said Ben Cushing, sustainable finance campaign director at the Sierra Club, in a statement. “Letting companies hide climate risks doesn’t make those risks any less real — it just makes it harder for investors to manage them and protect their long-term savings. The SEC is leaving investors in the dark at exactly the moment transparency and action is most needed.”

“The SEC was established to protect investors, and for more than 20 years, investors have clearly and overwhelmingly stated that they need more clear, consistent, and decision-useful information on companies’ exposure to climate-related financial risks,” said Steven M. Rothstein, Ceres’s managing director for the Ceres Accelerator for Sustainable Capital Markets, in a statement. “The ongoing acceleration of physical climate impacts, including the tragic fires in Los Angeles, has underscored the importance of transparency on these risks. Investors have clearly indicated they require better disclosure, with $50 trillion in assets under management broadly supportive of the rule adopted in March 2024. This is clearly a step backward in helping investors and other market participants have the information they need to manage climate-related financial risks.”  

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