Accounting
IRS signals leeway for tax deductions for fraud victims
Fraud victims wondering whether they can deduct a portion of their financial losses tied to scams on their taxes just got some clarification from the IRS.
In a
The five examples of scam losses covered in the memo reflect what experts say is
On the other hand, it generally ruled out tax deductions for victims of romance and kidnapping schemes. And it also noted that anyone withdrawing money early from an individual retirement account for a transaction that turns out to be fraudulent would still face normal penalties for those transactions. Furthermore, none of the five examples fit the definition of a Ponzi scheme that would qualify for additional deductions.
Complexity and controversy
Critics have called for reform of tax rules that are complex and
Since fraud losses represent an unfortunate “part of our shared reality at this point,” the guidance can aid advisors assisting victims in the wake of a scam, said James Creech,
“The mechanisms that the fraudsters use are so polished and organized. They know the right psychological levers to pull at the right times,” Creech said. “When these happen, it’s incredibly isolating, and I find that there are a lot of people who just don’t know where to turn, and they don’t know what to do.”
In that context, some victims may be further surprised to learn that the deductible losses add up to their original basis (i.e. the initial $10,000 in an IRA that has appreciated to $100,000) instead of including any of the unrealized gains. Also, they first must verify that their money is not recoverable, said Miklos Ringbauer, the founder of Los Angeles-based tax firm
“Until we know that we are a victim, there’s no deduction,” Ringbauer said. “Once we are aware of it, we make the appropriate police reports and everything else when it becomes apparent that it’s nonrecoverable.”
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The memo’s findings
The IRS memo acknowledged some of the confusion. For example, it noted the fact that there is “no statutory definition of ‘a transaction entered into for profit'” beyond some court-case analysis describing it as “a primary profit motive.” In addition, it cited some further IRS guidance
One important aspect of the qualification criteria for Ponzi losses requires a “lead figure” who is charged or otherwise named as a defendant in a criminal complaint alleging theft after they secured victims’ money, claimed to generate income, paid other investors through the earlier customers’ outlays and misappropriated those assets. None of the five circumstances discussed in the memo fit that definition. But three of them qualified for a separate deduction tied to the tax basis of their losses at the hands of “Scammer A.”
“For taxpayers who authorized distributions and transfers to new accounts or directly to Scammer A, we look to their motive in doing so to determine the character of the transactions. Taxpayers who establish that their motive was to transfer their investment funds from existing investment accounts to new investment accounts, i.e., to safeguard existing investments or to engage in new investments, had a profit motive when authorizing the distributions and transfers,” the memo said. “For taxpayers who were motivated to transfer funds to Scammer A as part of a non-investment scam, i.e., the romance scam and kidnapping scam, there is no profit motive for the transaction, and the loss is a disallowed personal casualty loss. For taxpayers who did not authorize any distribution or transfer, the loss does not result from the actions of the taxpayer, so that the relevant transaction for determining the character of the loss is the original investment and the motive of the taxpayer at that time.”
Regardless of that distinction, each of the victims must pay any penalties for early IRA withdrawals or outlays from other accounts subject to them. The lack of any deduction for the latter two cases would likely arrive as bitter news for an investor tricked into believing a new online romantic partner had a close family member “in dire need of medical assistance” or someone fooled by an artificial intelligence-generated recording into thinking a grandson had been kidnapped and needed a ransom payment.
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Room for improvement to the rules
The memo “shows that more victims than perhaps previously thought might qualify for the theft loss deduction, but it also illustrates how much work remains to help all taxpayers who find themselves victims of fraud,” according to a
“The memo offers important clarification on when and how taxpayers may claim a theft loss deduction,” Collins wrote. “It also exposes gaps in the current law that leave many taxpayers without meaningful relief.”
Besides asking lawmakers to eliminate the restriction on deductions for theft, Collins called on them to extend the three-year statute of limitations on refund claims to the IRS, waive the penalty on early IRA withdrawals for scam victims and enable taxpayers to amend prior returns to report income differently for the years that they sustained the losses. It’s not clear that such policy ideas will gain any traction as the current Congress
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How advisors can help
Despite the complexity, advisors “really
“It’s more of an art than a science. No one gets financial certifications to be a grief counselor,” Creech said. “Those are important conversations and I think, sometimes, they keep people alive.”
With
“The problem is, we live in a digital world and, in that process, we don’t do due diligence. We don’t think very quickly because we are faced with a catastrophic or emergency situation. In that process, our natural instinct is to protect,” Ringbauer said. “Today you don’t know if you are talking with me. For you as a taxpayer or an individual, the only protection you have is, you go back to the original source.”
Leigh Prather/Leigh Prather – Fotolia
It is getting a little difficult to talk about a post-tax filing season after April 15, 2025. With the use of tax extensions and the number of disaster-relief related extensions, many tax return preparers are seeing the tax filing season continue through the summer and fall.
It was the 70th anniversary of the April 15 tax filing deadline this year. Still, the statistics being reported by the Internal Revenue Service look fairly normal compared to the 2024 tax filing season. By April 18, 2025, the IRS reports that 140,633,000 tax returns had been filed, up about 1.1% from 2024. The IRS notes that typically an additional 10% of returns will be filed by the extended tax deadline of Oct. 15, 2025, representing an additional 16% of tax revenue.
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Further, all or part of 10 states had filing deadlines extended due to natural disasters, with filing deadlines ranging from May 1, 2025, to Nov. 3, 2025. The IRS typically releases an additional filing update in mid-July.
Tax refunds for 2025 of 86,021,000 were similar to 2024. The refund amount was an average of $2,942, up 3.3% from 2024. E-filings by tax professionals were 72,504,000, up by 1.7% from 2024, while self-prepared e-filings were up more modestly to 63,726,000. One interesting statistic from the IRS was that visits to IRS.gov were down significantly from 571,496,000 in 2024 to 322,948,000 in 2025.
The 2025 tax return itself was not too different compared to 2024, except for the usual inflation adjustments. Additional Form 1099-K filings perhaps made the most significant change for 2025 filings.
There were a few provisions from prior tax legislation still coming into effect in 2024, such as the ability to transfer the Clean Vehicle Credit to the dealer, which did result in some confusion and at least temporarily rejected claims for the credit.
Congress in 2024 did not adopt any major tax legislation to add further changes. The 2026 tax filing season could look very different depending upon whether Congress manages to pass new tax legislation this year. Tax professionals will have the expiration of the individual provisions of the Tax Cuts and Jobs Act to deal with if Congress does not act, and potentially new changes to deal with if Congress does act, although it is not clear how many of those changes might be effective for 2025.
Congress
Congress has approved a budget framework for a budget reconciliation tax package with a focus on extending those individual provisions from the Tax Cuts and Jobs Act. However, Congress is also trying to squeeze in some or all of President Trump’s tax proposals, including no tax on Social Security benefits, no tax on overtime, no tax on tips, a possible reduction in the corporate tax rate for domestic manufacturers, a deduction for interest on car loans, and perhaps a modification of the state and local tax deduction limit.
Possible revenue offsets to come within the budget framework numbers include spending cuts, tariff revenue, assumptions about economic growth resulting from the legislation, repeal of some clean energy credits, and using a budget gimmick to assume that extending current provisions in the Tax Code do not require revenue offsets, even though they add to the deficit.
It will be difficult to accomplish everything that congressional Republicans hope to include while also appeasing the deficit hawks among their members and Republican moderates vowing to preserve Medicaid.
The House has already introduced a series of tax bills addressing matters such as timing of receipt of electronic submissions, communication of math adjustments, disaster relief (including tying relief to state as well as federal disaster declarations), the ability to replace stolen checks electronically, and a bill to enhance certain administrative functions.
IRS
For the IRS, along with most of the federal government, it was far from a normal tax season. Having just staffed up for more enforcement, customer service, and technology improvements thanks to funding from the Inflation Reduction Act, the IRS is now facing a possible 25% reduction in its workforce through a deferred resignation program and a voluntary separation incentive program.
In addition, although it is still tied up in the courts, there may still be departures of provisional employees. Leadership at the IRS has also been unstable, with three interim IRS commissioners since IRS Commissioner Daniel Werfel resigned on Jan. 17, 2025.
Other changes announced by the IRS include elimination of the beneficial ownership information reporting requirement for domestic entities and declaring obsolescent a variety of old guidance.
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Congress acted to overturn the IRS requirement for crypto broker DeFi reporting on Form 1099-DA. The IRS also announced the withdrawal of the final regulations on partnership basis-shifting transactions involving related parties as a transaction of interest.
However, Revenue Ruling 2024-14 appears to remain in effect, providing that the economic substance doctrine applies where basis shifting among related parties does not have economic purpose or substance. There are also indications that the IRS Direct File program, which was around for 2024 and 2025, will not be continued for future years.
Summary
The relative stability of the 2025 tax filing season is likely to be very different next tax filing season. Congress hopes to pass major tax legislation, some of which will preserve the status quo but other parts of which will present new tax filing challenges.
It is still too early to ascertain the impact on the IRS; however, the loss of so many employees and leadership turnovers point to less enforcement and compliance activity, and less revenue collected from such activities, including a pullback of the effort to increase partnership audit activity. There could also be a return to declines in customer service.
At the American Bar Association Tax Section meeting in Los Angeles in February 2025, no representatives of the Treasury or the IRS were permitted to attend or participate in the usual discussion panels.
At the time of this writing, the next meeting of the Tax Section was due in mid-May, in Washington, D.C. It will be interesting to see if government panelists are permitted to go the few blocks to the conference. Usually, the exchange of ideas is very helpful to the tax professionals in attendance and to the government personnel seeking comments on proposed guidance.
Big Four firm PwC announced new agentic AI capacities, including a model that proactively identifies areas of value leakage and acts inside the tools teams already use to fix them itself.
The new solution,
The software, which is supported by PwC’s recently released
The system connects directly into ERP environments, continuously monitors key metrics, and acts inside the tools teams already use. For example, a supply chain agent might detect rising shipping costs and automatically reroute deliveries to reduce spend. Finance agents can spot and correct billing errors before they reach the customer. Clients typically see measurable efficiency gains in the first quarter, with continued improvements over time as the system learns and adapts.
“Too many transformations still rely on one-off pilots and stale data, stretching the gap from insight to impact and suffocating ROI,” said Saurabh Sarbaliya, PwC’s principal for enterprise strategy and value. “Agent Powered Performance flips the economics by distilling PwC’s industry transformation playbooks into AI agents that turn static insights into compounding gains, without rebooting each time.”
Agent Powered Performance is platform-agnostic and built on an open architecture so it can work across different LLMs based on client preferences and task-specific needs. It works with major enterprise platforms including Oracle, SAP, Workday and Guidewire.
Agent OS Model Context Protocol
PwC also
By integrating this standard, agent systems registered as MCP servers can be used by any authorized AI agent. This reduces redundant integration work and the overhead of writing custom logic for each new use case. By standardizing how agents invoke tools and handle responses, MCP also simplifies the interface between agents and enterprise systems, which will serve to reduce development time, lower testing complexity, and cut deployment risk. Finally, any interaction between an agent and an MCP server is authenticated, authorized and logged, and access policies are enforced at the protocol level, which means that compliance and control are native to the system—not layered on after the fact.
This means that agents are no longer siloed. Instead, they can operate as part of a coordinated, governed system that can grow as needs evolve, as MCP support provides the interface to external tools and systems. This enables organizations to move beyond isolated pilots toward integrated systems where agents don’t just reason, but act inside real business workflows. It marks a shift from experimentation to adoption, from isolated tools to scalable, governed intelligence.
Research Composer
Finally, a PwC spokesperson said the firm has also launched a new internal tool for its professionals called Research Composer, a patent-pending AI research agent embedded in the firm’s ChatPwC suite, designed to accelerate insight generation by combining web data with PwC-uploaded content.
Professionals will use the Research Composer to produce in-depth, citation-backed reports for either the firm or its clients. The solution is intended to enhance the quality of client work by equipping teams with research and strategic analysis capabilities.
The AI agent prompts users through a step-by-step research workflow, allowing them to shape how reports are packaged—tailoring the output to meet strategic needs. For example, a manager in advisory services might use Research Composer to evaluate white space opportunities across industries or geographies, drawing from internal reports and up-to-date market data.
Eide Bailly, a Top 25 Firm based in Fargo, North Dakota, is growing its presence in the Pacific Northwest by adding Traner Smith, based in Edmonds, Washington, effective June 2, 2025.
Traner Smith’s team includes two partners and 16 staff members and specializes in tax compliance and advisory services. Financial terms of the deal were not disclosed. Eide Bailly ranked No. 19 on
Eide Bailly already has offices in Seattle, but hopes to grow further in the Pacific Northwest. “We’re pleased to welcome the talented team at Traner Smith to Eide Bailly,” said Eide Bailly managing partner and CEO Jeremy Hauk in a statement Monday. “Their expertise with high-net-worth individuals, real estate and privately held businesses aligns well with our strengths, and their client-centric approach is a perfect cultural fit. Having an office in Edmonds, Washington, is a great complement to our existing presence in Seattle. Together, we’re poised to deliver even greater value to families and businesses in the Seattle metro area.”
“Joining Eide Bailly is a natural next step for us — it provides access to deeper technical resources in areas like state and local tax, national tax, succession planning and international tax while allowing us to continue the personalized service our clients value,” said Kevin Smith, a partner at Traner Smith, in a statement.
“With this expanded support and platform, we’re excited to grow our reach, elevate what we do best, and help more clients than ever before,” said Shane Summer, another partner at Traner Smith, in a statement.
Eide Bailly has announced several other mergers in recent weeks. Earlier this month, it added
In 2023, Eide Bailly added
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