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IRS signals leeway for tax deductions for fraud victims

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1 year ago

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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 memo released last month, the IRS Office of Chief Counsel stated that victims seeking to protect their assets when they fell for a fraudster’s scam usually may deduct the tax basis of their losses for the year they discovered the theft. Previously, some financial advisors and tax pros had questioned whether that motive for moving assets qualified for the definition of “a transaction entered into for profit,” rather than a “personal casualty loss” — a type of deduction that the Tax Cuts and Jobs Act limited solely to disaster areas.

The five examples of scam losses covered in the memo reflect what experts say is a growing risk to consumers as fraudsters become more sophisticated at stealing their money. The memo held that the victims of compromised accounts, so-called pig butchering and phishing scams could receive the deduction for their tax basis. 

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 harmful to fraud victims. The IRS’ ruling is welcome, then, for allowing advisors and tax experts room to stem damages from efforts to safeguard assets for future investments.

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, a director with law firm Baker Tilly’s tax advocacy and controversy practice.

“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 MiklosCPA.

“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.”

READ MORE: Rising scam risk calls for coordinated prevention strategy, study says

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 from 16 years ago laying out the circumstances that investors can obtain a “safe harbor” from taxes on their losses from a Ponzi scheme. 

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.

READ MORE: Financial professionals have slowed the growth of elder fraud cases

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 blog post on it last week by National Taxpayer Advocate Erin Collins, head of an independent IRS unit that evaluates the agency’s operations and reports recommendations to Congress and the rest of the government. Last year, Collins listed tax-related scams as among the agency’s “most serious problems” and called for letting the limitation on deductions for theft losses expire at the end of the year.

“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 considers the sunsetting provisions of the 2017 law this year, since they would increase the cost of the legislation.

READ MORE: Tax Cuts and Jobs Act expiration: A guide for financial advisors

How advisors can help

Despite the complexity, advisors “really play such a critical role” through empathy for the victims combined with the technical expertise to point them to the next step, according to Creech of Baker Tilly. They often feel the sense that they “worked so hard to build this legacy, and now it’s gone and I have nothing to show for it,” and Creech has spoken with many who have gone from expecting “a very comfortable retirement to having Social Security income only,” he said. Asset allocations or interest rates often seem much easier to discuss.

“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 AI and other technology bringing new types of risk, advisors and tax pros should guide clients on prevention strategies to avoid the scams in the first place, Ringbauer said. For instance, if they hear from someone claiming to be from their financial institution, they should either hang up from the call or refrain from answering the text message, according to Ringbauer. Then they can take the time to call into the corporate headquarters separately on their own to see whether there is any legitimacy.

“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.”

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Mandatory ESG Reporting Standards Demand Standardized Non-Financial Audit Trails

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1 day ago

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September 5, 2026

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Mandatory ESG Reporting Standards Demand Standardized Non-Financial Audit Trails

Corporate accounting departments face an expanded regulatory mandate as mandatory sustainability and Environmental, Social, and Governance (ESG) reporting frameworks take full effect internationally. Governed by the European Union’s Corporate Sustainability Reporting Directive (CSRD) and the International Sustainability Standards Board (ISSB) IFRS S1 and S2 standards, enterprise financial controllers are now legally required to track, verify, and report non-financial data with the same internal controls and auditability as traditional financial statements.

The expansion shifts ESG compliance

This regulatory expansion shifts ESG compliance from marketing departments to corporate accounting offices. Financial managers are now responsible for gathering, consolidating, and verifying carbon emissions metrics, supply chain labor conditions, water usage, and climate risk exposures across multi-tiered corporate structures. These non-financial metrics must be integrated into standardized general ledgers to withstand rigorous third-party audit assurance processes.

To comply with these rigorous reporting mandates, accounting software providers have added dedicated ESG modules designed to aggregate data from IoT sensors, utility platforms, and vendor management systems. Controllers are implementing internal control frameworks—modeled after traditional COSO frameworks—to ensure the completeness, accuracy, and consistency of sustainability disclosures, protecting organizations against greenwashing penalties and litigation risks.

The transition requires significant cross-functional collaboration between accounting teams, legal counsel, and operational directors. Accounting professionals are expanding their technical expertise beyond financial ledgers to master carbon accounting methodologies, lifecycle assessment standards, and non-financial data governance protocols, fundamentally expanding the role of the modern corporate accountant.

Why This Information Matters
Mandatory ESG disclosures require companies to treat environmental and social metrics as audited financial records. Executives, accountants, and board members must institute formal tracking and assurance processes to satisfy legal mandates, maintain investor confidence, and mitigate regulatory non-compliance risks.

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Accounting

SEC’s Semiannual Reporting Proposal Faces Investor Pushback: What CFOs Need to Know

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2 weeks ago

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August 25, 2026

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U.S. Securities and Exchange Commission (SEC)

A proposal from the U.S. Securities and Exchange Commission to potentially shift some public companies away from quarterly financial reporting toward a semiannual model is drawing significant pushback from investors, even as it continues moving through the regulatory process. The debate has direct implications for corporate finance teams, auditors, and the broader transparency of U.S. capital markets.

What the SEC Proposed

According to a summary published by accounting advisory firm Cohen & Co., the SEC issued a proposed rule on May 19, 2026, aimed at simplifying financial reporting requirements for many U.S. public companies. The proposal would potentially reduce the frequency of certain mandatory disclosures from quarterly to semiannual, a structural change that has not been made to core U.S. reporting requirements in decades.

The proposal follows an extended debate within U.S. policy circles, with proponents arguing that reduced reporting frequency could lower compliance costs and free up management time for longer-term strategic planning rather than quarter-to-quarter results management.

Why Investors Are Pushing Back

Comment letters submitted in response to the proposal have been extensive, and according to Cohen & Co.’s review of the public record, investors “appear to be largely opposed” to the shift, viewing frequent interim reporting as a core benefit of U.S. capital markets relative to other jurisdictions.

Accounting and law firms have taken a more measured position, generally urging any changes to remain aligned with the Financial Accounting Standards Board (FASB), whose existing disclosure requirements and guidance are built around a quarterly reporting cadence. A shift to semiannual reporting without corresponding changes to FASB guidance could create friction between SEC filing requirements and GAAP-based disclosure expectations.

Lessons From the U.K. Experience

The debate is not without precedent. The United Kingdom moved away from mandatory quarterly reporting for listed companies in 2014, returning to a semiannual disclosure requirement. According to Cohen & Co.’s analysis, that experience offers a cautionary data point: there was no measurable increase in capital expenditure or R&D investment following the change, while analyst coverage of affected companies declined as reliable interim information became less available — a particular risk for smaller and newly public companies that rely on analyst coverage to maintain investor visibility.

Practical Implications for Finance Teams

Beyond the debate over disclosure philosophy, the proposal carries practical complications. Many companies have debt covenants and credit agreements structured around quarterly financial delivery; a shift to semiannual reporting could require renegotiating those terms. Reduced reporting frequency would also extend the “window of market silence” between disclosures, a factor that governance and investor-relations teams would need to manage carefully to avoid information asymmetry.

Separately, and unrelated to the reporting-frequency debate, the SEC and FASB have continued finalizing more routine updates this year. New Accounting Standards Updates are taking effect for December 31, 2026, fiscal year-ends covering income tax disclosures, credit loss measurement, induced debt conversions, and stock compensation, according to Eide Bailly’s review of 2026 ASU activity. Additional guidance on paid-in-kind dividends and environmental credits is also on the near-term horizon.

What to Watch Next

The semiannual reporting proposal remains in the comment and review phase, and no final rule has been adopted as of this writing. Finance leaders should monitor the SEC’s regulatory agenda for further movement, while treating the current quarterly reporting requirement as the operative standard until any final rule is issued and an effective date is set.

Given the extent of investor opposition documented in the comment file, a full shift to mandatory semiannual reporting appears more likely to result in either a scaled-back compromise or continued study rather than swift adoption — though the SEC’s ultimate direction remains uncertain.

 

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Accounting

AI-Driven Automation and Continuous Accounting Frameworks

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3 weeks ago

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August 15, 2026

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The accounting profession is undergoing a fundamental structural transition as enterprise finance departments shift from periodic month-end closes toward automated continuous accounting models. By integrating specialized machine learning algorithms directly into enterprise resource planning (ERP) platforms, chief accounting officers are transforming financial reporting from a retrospective exercise into a real-time operational asset.

The Shift from Periodic Close to Continuous Financial Reporting
Traditional accounting workflows heavily relied on manual data reconciliation, spreadsheet calculations, and multi-week closing cycles at the end of each fiscal period. In contrast, continuous accounting frameworks utilize automated software agents to process, validate, and post transactional data in real time as business activities occur.

Automated bank reconciliation tools cross-reference incoming bank feeds, invoice records, and purchase orders automatically. By resolving transactional variances instantly throughout the month, corporate accounting teams eliminate the traditional workload spikes associated with quarterly and annual closes.

Machine Learning in Audit Trails and Anomaly Detection
Advanced natural language processing (NLP) and machine learning tools are redefining internal audit and financial control environments. Automated systems analyze 100% of general ledger entries, identifying anomalous transactions, duplicate payments, and unauthorized journal entries in real time.

Rather than relying on random statistical sampling, corporate internal auditors can focus their attention on high-risk flags automatically surfaced by algorithmic monitoring platforms. This continuous risk assessment strengthens internal controls over financial reporting (ICFR) and significantly reduces fraud risk.

Evolving Roles for Accounting Professionals
As routine data entry and manual reconciliation tasks become fully automated, the skill set required for accounting professionals is shifting toward data analysis, system design, and strategic business advisory.
– Systems Governance: Accountants are increasingly responsible for monitoring algorithmic accuracy and managing data integration pipelines.
– Business Partnership: Finance professionals leverage real-time financial dashboards to advise operational leaders on margin management and working capital allocation.
– Regulatory Compliance Management: Accounting teams utilize automated platforms to ensure compliance with dynamic tax codes and international accounting standards.

Core Implementation Recommendations
1. Deploy Automated Reconciliation Tools: Integrate continuous transaction processing modules into existing enterprise ERP architectures.
2. Establish Algorithmic Governance Controls: Implement strict internal testing protocols to ensure automated accounting rules comply with GAAP/IFRS standards.
3. Reskill Accounting Teams: Invest in training finance staff on data analytics, workflow automation, and predictive financial modeling.

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