Accounting
IRS gives new guidance for scam victims to deduct theft loss
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
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.
“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.”
The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.
The
- ISA 620, Using the Work of an Auditor’s Expert;
- ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
- ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
- ISRS 4400 (Revised), Agreed-upon Procedures Engagements.
The IAASB is asking for comments via a digital response template that can be found on the
In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.
President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an
The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings.
Trump has
Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.
Food prices could rise by 2.6% in the short run due to tariffs, according to an
The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.
Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist
Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time.
“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said.
One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load.
“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai.
Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies.
“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.
However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area.
“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai.
As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales.
“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai.
While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves.
“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”
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