IRS to allow Ponzi victims to claim theft losses

Accused swindler Bernard Madoff enters the Manhattan federal court house in New York March 12, 2009. REUTERS/Shannon Stapleton

WASHINGTON (Reuters) - The Internal Revenue Service issued new rules on Tuesday that would allow victims of Ponzi schemes like the one run by Bernard Madoff to recoup some money by claiming theft losses on their tax returns for 2008.

Investors in Madoff’s scheme would theoretically have been paying capital gains taxes on the profits they made from his investment. Since those profits turned out to be phony, the IRS said investors should be entitled to a refund of those taxes.

As theft losses, investors are entitled to a much larger deduction than the normal “capital loss” deduction, which is typically capped at $3,000 per year.

Under the new rules, victims would be able to take a deduction of as much as 95 percent of the amount they invested, plus investment income they thought they had earned, subtracted from any money given back to them by the government’s insurance program, the Securities Investor Protection Corporation.

The new rules were announced by IRS Commissioner Douglas Shulman in testimony to the Senate Finance Committee.

“It is unfortunate in these otherwise difficult economic times that we are here today to discuss a situation where thousands of taxpayers have been victimized by dozens of fraudulent investment schemes,” Shulman told the committee.

Bernard Madoff, 70, was jailed on Thursday after pleading guilty to running the biggest investment fraud in Wall Street history that drew in as much as $65 billion over 20 years.

His sentencing on 11 criminal charges is scheduled for June 16, when he could be imprisoned for the rest of his life.

Shulman underlined that the new rules are not specific to Madoff and would apply to any victim of a Ponzi scheme.

Reporting by Corbett B. Daly, editing by Anthony Boadle