How do i write off a ponzi scheme investment. I need specifics, not the IRS publication. Like what forms need to be filled out and submitted? Thank you

[Borbom4ever]

Thanks for the explanation and that why I need to find an experienced CPA to file my tax return at least they know what questions should be asked. 

[janelurie1-mac-c]

is there hope that TurboTax will ever handle this type of loss carry forward?

[SharonD007]

Please clarify if you are referring to a theft loss?

[janelurie1-mac-c]

I am talking about a loss carry forward from being a victim of a Ponzi scheme.

[madmanc20]

@janelurie1-mac-c

I've gone through a Ponzi scheme deduction and recovery process for $0.5M. I personally think turbotax will never cover this because so many ambiguities. IRS's own guidance leaves plenty of room for interpretations. Since this doesn't impact majority of tax payers, doubtful IRS will make much effort. Current incomplete guidelines are already 10-15 years old. Based on this, it is very unlikely Turbotax will touch such area.

For someone who prepares their own taxes with tax software. Filing the deduction is tricky. Even CPAs need to consult with IRS. Filing when receiving recoveries are possible (I did mine) assuming you know what the calculations are. IRS relies on you to keep records to decide what amount of recoveries are taxable.

The general summary on filing deduction and recoveries are

1. IRS safe harbor guidelines provide deduction on the year of "discovery" of theft. Can claim 90% or 75% deduction depending on anticipated recovery. I chose 75%. Need to file form 4684 (section B part 1, part 2, section held for more than 1 year). Usually someone from gov has to say "Ponzi" or "Ponzi-like" In my case, SEC got involved and issued a letter stating "Ponzi-like" just for this purpose. But this was a $600M Ponzi scheme case. Much smaller amounts may not have such support.

2. Figure out the losses. Its not just principles. Could include phantom income (Ponzi investment returns which never received (just added to investment principle) but paid taxes in prior years)

3. On recoveries, if taken 75% deduction, then first 25% is tax free. After that is taxable (ordinary income, Sched 1 Part 1 Other income, include stmt on what it is. So Turbotax already handle the Ponzi recovery filing) Recoveries usually come from multiple sources as well. In my case, it came from 1) class action lawsuit to the auditor 2) lawsuit to the financial advisor 3) bankruptcy proceeding recoveries.

There are more complex schemes such as spreading loss deduction out longer via carry forwards. I didn't do this.

Anyway, you can see my posts in this thread for more info.

[Borbom4ever]

I don’t think Turbo tax software can handle form 4684 (section B part 1, part 2, section held for more than 1 year).  I have to find a CPA firm to file this form 4684 (section B part 1, part 2, section held for more than 1 year). 

[janelurie1-mac-c]

Thanks. I went to an accountant for the first year, Safe Harbor process. Now we don’t owe any taxes which is why I am doing TurboTax. But I wanted the NOL carry forward on my returns  because hope springs eternal…not for any Ponzi return but for some unexpected pleasant surprise. My 4th “expert” found the NOL. But one of my previous experts said there was no way to enter an NOL. She said I could print  out the return as far as I’d gotten, show the return to an accountant, get directions on what is needed to enter the NOL and then come back and enter it and eFile.  It it turns out when you print out a return, TT decides you have filed by mail. So when I came back and entered the NOL, the return was classified as an amended return and I had to print it and mail it in. Pain in the neck.

[Borbom4ever]

Thanks and what is NOL?

[janelurie1-mac-c]

Non Operating Loss. I am not sure how she figured it out. But it represents some of the money I lost in the Ponzi.

[Borbom4ever]

Got it thanks. Probably every accountant has a way to make the return carry over NOL. Hopefully IRS will accept it with no audit.

[janelurie1-mac-c]

Me too.

[madmanc20]

Yes NOL (Net Operating Loss) is the more complex deduction I mentioned in prior post. I knew one Ponzi case that used NOL. As I understand it, it spreads loss out over 10? years (I think both forward and backwards (require amending?) This was desirable in case of retiree income levels where a single large deduction would be wasted against a single year. Therefore, need to create a "carrying" (eg carry forward) mechanism.

[Borbom4ever]

Yes it make a sense. If your income was not high enough, then carryover long term was a good choice. Which accountant did your first year tax of Ponzi schemes? Most accountants don’t have the knowledge to handle Ponzi schemes tax returns.

[madmanc20]

Yes, most CPAs have not encountered and the ambiguous safe harbor leaves many open questions.

I went with my financial advisor's (manage $4B of total asset, regional presence (Seattle main hub with other smaller west coast locations through buying out retiring advisory firms)) tax team. The long term heads of these tax depts handles fairly complex returns and usually have encountered Ponzi returns before. But these tax teams are only available for advisory clients.

Too small advisory firm (say few people) just enlist some local CPAs and they've often not seen it before (saw this case with one Ponzi victim, CPA had to communicate with IRS for many clarifications). Too huge firm (Schwab etc) have teams geographically distributed all over don't know how personal they get.

So I guess mid/largeish financial advisor firm's tax dept is best choice but only if you can access one. Most independent CPAs haven't seen Ponzi deductions before. Even ones that charge high rates (handles a lot of business returns)

[janelurie1-mac-c]

The accountant I used to was a one time offer. Just for that year  as a favor to my friends, who are clients. And I was asked not to refer anyone. Their practice is full. I am so sorry. The Ponzi that we were involved in had a large very organized victims group that had a Facebook page full of information. But that page has been closed. Maybe you can contact other victims in your case.