Ponzi Scheme 1099

[craftymom77]

I was involved ina Ponzi Scheme. He went to trial in 2023 and is in prison. We will be getting a part of our initial investment back once everything is sold and maybe more if he makes money when out of prison. I'm not worried about that part as much as all of the 1099's that I claimed from 2009 through 2020.

Can I add up the fake 1099 income and put it on my 2023 tax form as theft?

I have read so much about ponzi schemes and how to get your investment back but nothing on how I can get a return on all  the income that I claimed that I never actually had in the long run.

Does anyone have a simple answer for me on what to do with these fake 1099's? Thanks

[DianeW777]

it depends.  The scheme is defined in the following federal links.  It's important to review for your specific situation, the year of the known loss, recovery year or years.

• Help for Victims Of Ponzi Investment Schemes - Click the FAQ links as well.
• The Revenue Procedure 2009-20 is the simplified compliance. 

You will use Form 4684, Section C to claim your loss if applicable. Note that recovery in a future year will be income after taking the loss.

[craftymom77]

I've read all of those publications. If I've read everything correctly that form is for collecting a percentage of your investment etc. I am not concerned at all regarding that part.

My concern is where I put the amount from the 1099's that I received. I did not really have that income so I want to show that my income was a lot less than what I had inputted on my tax forms.

Does anyone have an answer to that exact question?

[DianeW777]

It's not that simple because it is a Ponzi scheme and you will collect money based on your first question. 

1. Understanding any money received in a future year will be income, you can use the 4684 to enter your Ponzi investment loss in 2023* using Form 4684, Section C.  Based on parts of your question you know what the loss is that you sustained (only amounts previously reported as income), this is your loss assuming you have not yet received income repayment.
   • *Assumptions that your total loss was declared and used in the court case in 2023 or you have other definite evidence.  
2. This will be carried to your Schedule A and included with other itemized deductions.

Note: If you know the amount of any collections/repayments for 2024, then your loss should be reduced by those specific and definite amounts on the 2023 tax return. 

[Opus 17]

I think you need to see an accountant.  Ponzi scheme losses and gains are really difficult to report and Turbotax does not support this calculation. 

[craftymom1]

Thanks Diane for sticking with me.

I know what I am getting back from my initial investment so let's say that I am not losing anything from the money I invested. That amount was used in the court case. He had purchased houses, cars etc and they were sold to repay all of his investors.

I think what you are telling me is that I can add all of the income on the 1099's from 2009 to 2020 and use that amount as my loss on form 4684 #42? And in saying that I am only going to get 75% of my loss?

You have been very helpful!

[craftymom1]

I'm sorry Opus 17. There is not one single accountant in my city that has a clue about Ponzi Schemes so that is why I am trying to figure it out myself.

If it were only that simple.

[DianeW777]

If you qualify under the safe harbor method (Revenue Procedure 2009-20, modified by 2011-58), you should use Section C and then move the result to Section B, Form 4684. If this optional safe harbor method is used then the IRS will not challenge the loss. 

I want to lead you again to the instructions for Form 4684 to dig into how to enter it. 

@craftymom1 

[Mike9241]

this is a personal conclusion. you reported income but apparently left the income with the scammer to reinvest. So this would add to your initial investment.  if you got cash back for this. it complicates the loss reporting see a tax pro. 

[j0ntaxID00]

@DianeW777  I have seen it argued both way about what to report in 2023. I may be in a similar situation as the OP. I suffered loss due to a ponzi scam in 2022. The discovery year was 2023 and earlier this year I received partial payment and was told more would come in 2024 and possibly 2025 and maybe even beyond.

Here are my follow up questions:

1. I have my cost basis of what I actually invested but the company has its own definition of my “claim value”. They are similar, but my cost basis is greater. What value do I put on line 40 of Section C Part I on 4684?

2. You seem to be saying that I put the amount that was recovered earlier this year, even though it was in 2024, in the Actual Recovery (Line 48). Instructions for Form 4684 says, "Enter the amounts you actually received as a reimbursement or recovery from any source. Don't include amounts that are potential direct recoveries (defined earlier) or potential third-party recoveries (defined earlier)” but it doesn’t say whether one should enter the amount from the same year or not (i.e. entire recovery in the same year as the tax filing year). What’s the justification for entering an amount recovered in 2024? Is it wrong to exclude the amount that was recovered in 2024 and just report as income in 2024? If I received this in, say, July after I filed my tax return for 2023, I wouldn’t have included this so surely it can’t be wrong to not include it?

3. Tax implications for 2024. Say my loss was $200,000. Let’s assume that I claimed $200,000*.75 in Line 47. If I recover $100,000 in 2024 and nothing after that (i.e. forever lost). Then what would be my tax liability?  How would this differ, it at all, depending on whether I put something in Line 48 or not for tax year 2023?

THANK YOU!

[RobertB4444]

That form 4684 is not for an investment that turned out to be worthless.  That is for claiming income that you reported in prior years that has turned out to have not been real income.  

It sounds like what you have is an investment that you made in a company that turned out not to be a real or valid investment.  When you make an investment like that you can take a deduction for your loss when it becomes worthless.  Which, based on what you've written, won't be until at least 2025.

The payments that you receive are a return of your investment.  So each year you will enter the amount that you receive as a sale of an investment with no 1099-B received and no basis reported to the IRS.  And you will reduce your basis in the investment by the amount that you receive.  

For example, if you originally invested $200,000 and you receive $10,000 then you enter that as a sale of your investment with a sale price of $10,000 and a basis of $10,000.  Then you basis going forward would be $190,000.  

You reduce it every time you receive a payment until you receive the final one.  At that point you would enter the final payment you receive as well as whatever basis is remaining.  This should result in a loss equal to the amount of the original investment that you will never receive back.

@j0ntaxID00 

[Opus 17]

@j0ntaxID00 

The special "Ponzi scheme" loss method is only for use in the following situation:

Suppose you invest $100,000 with broker A in 2021.  In January 2022, broker A sends you a 1099-B or 1099-DIV showing that your investment earned $50,000 that was reinvested.  You pay income tax on the $50,000 earnings and your basis is now $150,000.  In January 2023 broker A sends you a 1099 for another $50,000 of profits that were re-invested, and you pay income tax on that.   In January 2024, broker A is arrested and you discover it was a Ponzi scheme, and you never had $200,000 invested.  You get back $10,000.  In addition to the original investment loss (invested $100,000, got back $10,000 for a $90,000 loss), you also paid tax along the way for money that never really existed.  That's what the Ponzi scheme loss deduction is for.

On the other hand, if you invested $200,000, never paid tax on interim profits, and discovered you can only get back $100,000, then you have an ordinary capital loss to be reported on schedule D and form 8949, but not a Ponzi loss.  The only part of the situation that would be a Ponzi loss is money that you paid tax on that never actually existed. 

Let's get some basics from you.

What year did you invest and how much did you invest?  Did you receive cash payouts that you paid tax on?  Did you receive 1099 statements for "profits" that were "reinvested" and you paid tax on the profits that were never real?  How much and in what years?  How much will you recover and when?