Filing with form 4684 SectionC "Theft Loss Deduction for Ponzi-Type Investment Scheme Using the Procedures in Revenue Proceedure 2009-20"

[PJC4]

I see that form 4684 is supported in desktop version and I was able to add it to my return and completed it....

Question: After completing form 4684 Section C, Part I and Part II I noticed that Turbotax completed 4684 Section B Part II and assumed ALL THE LOSSES were from "Casualty or Theft Property Held One Year of Less"

and entered the loss on line 29.  The losses are actually all from Property held more that one year.... Why does Turbotax make this assumption and how to I get it to report the loss accurately?

Thanks for any advice you can provide....

[tagteam]

See https://www.irs.gov/pub/irs-drop/rp-09-20.pdf and I do not believe this is supported (or not fully supported) by TurboTax (as per the Guidance):

Ponzi schemes and other fraudulent investment arrangements

We're sorry to hear about this loss. Unfortunately, this type of loss can be particularly complicated for tax purposes, and in many situations the tax treatment depends on factual determinations best handled by an attorney. TurboTax does not support tax losses from investment fraud. We recommend consulting a tax professional if you've experienced this situation.

[PJC4]

Can you comment on this response given by GeorgeM777 (Expert):

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To provide at least some background information, a loss incurred in connection with a Ponzi scheme is an itemized deduction and thus, after being entered on Form 4684, it will appear on Schedule A, Itemized Deductions.  TurboTax does not support Form 4684, at least in the Step-by-Step section. Thus, assuming you feel confident that you can claim such a loss, you will need to go into Forms mode in TurboTax.  Forms mode is only supported if you are using TurboTax CD/download versions.  To go into Form mode, select Form in the upper right of your screen.  You will have to enter Form 4684 in the search bar and select the Casualty & Theft Worksheet.  Enter a description.  Click on Add Form.  

Then follow these steps:

1. You will now see the Casualty & Theft Worksheet.  The description you previously entered will appear on Line 1.  
2. On line 2, enter the date.   Then go to line 5(c) and check the box. 
3. Go back to Open Forms (upper left of screen), enter 4684, and from the drop-down list, select Form 4684 p3: Casualty & Thefts.  
4. You will now see Form 4684, p3, Section C.  Enter your information on lines 40 – 51.  
5. On line 46, when you enter the appropriate percentage, TurboTax will calculate the amount of your deductible theft loss. 
6. You will also need to complete Part II, of Section C, Form 4684. 

Lastly, we strongly encourage you to review IRS Rev. Rul. 2009-9, and Rev. Proc. 2009-20--as to the proper treatment of losses from certain investment arrangements later discovered to be fraudulent. The former addresses the tax treatment of losses from Ponzi schemes in the light of section 165 of the Internal Revenue Code. The latter provides an optional safe harbor under which qualified investors may treat a loss as a theft loss deduction when certain conditions are met.

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[tagteam]

Those instructions appear to work properly after entering some figures in Forms Mode; the ultimate loss appears to flow to the proper form and Schedule A.

You should use caution, however, to ensure there are no overrides (advertent or inadvertent), which will appear in the form of a line or lines highlighted in red.

[PJC4]

Thanks for your reply!

After following this procedure I have the following observation and question:

After completing form 4684 Section C, Part I and Part II I noticed that Turbotax completed 4684 Section B Part II and assumed ALL THE LOSSES were from "Casualty or Theft Property Held One Year of Less"

and entered the loss on line 29. The losses are actually all from Property held more that one year.... Why does Turbotax make this assumption and how to I get it to report the loss accurately?

Thanks for any advice you can provide....

[tagteam]

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@PJC4 wrote:

Why does Turbotax make this assumption and how to I get it to report the loss accurately?

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I have no insight into the programming in that regard. I can only assume that what you are experiencing is due to the fact that the particular type of loss is not supported. 

Other than overrides, I have no idea as to how to get your loss reported accurately and note that overrides will void the TurboTax accuracy guarantee and may result in errors on your return. You will also likely have to print and mail your return as overrides typically disallow the ability to e-file.

[PJC4]

Can you provide detailed instructions/procedure for making overrides? This will help me decide on best path forward.

[tagteam]

You would make an override by placing your cursor in the box or line on the form, right-clicking, and selecting override from the dropdown menu.

Please make sure that the short-term treatment for the type of loss you sustained needs to be categorized as long-term or short-term.

[PJC4]

Yes the instructions in IRS Revenue Procedure 2009-20 and instructions for Form 4684 explicitly state that Part II needs to be completed AFTER COMPLETING SECTION C.... and in those details it asks for the breakout of assets held <=1year and assets held >1year.... so it is a requirement.....

I don't think it impacts the bottom line with respect to the theft loss deduction but they want the info to be accurate....

Here is my plan (I would greatly appreciate your feedback on this...)

I will save the return with the 4684 form once completed (without any overrides) for a baseline.

I will make the overrides for 4684 Section B Part II and save a new copy of the return.

I will compare all data in the returns and make sure the differences can be accounted for.

I will then test to see if it allows efile with the overrides.

If it does not allow efile I will mail it in....

[tagteam]

@PJC4 

Your plan seems logical and well-reasoned.

I have noted, however, that the Safe Harbor provision of Rev. Proc. 2009-20 indicates that the executed statement in Appendix A must be completed and attached to your return. 

EDIT: If you qualify to use Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, and choose to follow the procedures in the guidance, first fill out Section C to determine the amount to enter on Section B, line 28. Skip lines 19 through 27. Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. You don't need to complete Appendix A.

[PJC4]

Thanks for the feedback.

Appendix A in Rev Proc 2009-20 is replaced by From 4684 Section C Part II

This is completed as part of the process recommended by GeorgeM777 (Expert), so it is already included in the return.

[tagteam]

Understood, and note the following from the instructions for Part II:

If you had a casualty or theft gain from certain trade, business, or income-producing property held more than 1 year, you may have to recapture part or all of the gain as ordinary income. See the instructions for Form 4797, Part III, for more information on the types of property subject to recapture. If recapture applies, complete Form 4797, Part III, and this line, instead of Form 4684, line 34.

Since you are not filing Form 4797 for this loss (because you have no recapture), I am starting to believe that it is appropriate to enter the loss in the same manner as does TurboTax (just a thought).

[PJC4]

In my case there were no gains so Line 33 is not applicable.

However, Instructions for lines 29 and 34 read as follows:

"On lines 29 and 34, use a separate line to
identify each casualty or theft. If you have more
than two casualties or thefts, attach an
additional sheet following the format of lines 29
and 34."

The only difference between lines 29 and 34 is that line 29 is for "...Property Held One Year or Less"

and line 34 is for "...Property held more that one year" (according to the titles on the form).

Any feedback on this interpretation?

[tagteam]

You are correct, it's just that I believe the actual section of entry to be immaterial as the result is exactly the same in either case.