Bernard Madoff, the IRS, and Tax Masters

The Bernard Madoff story has created some ripples that are growing into waves, threatening to further damage the economy and potentially negatively impact IRS revenues. With losses related to the alleged Ponzi scheme estimated at $50 billion, many direct and hedge fund investors have been floored by what is shaping up to be one of the largest Ponzi schemes in history. Investors are scrambling to find ways to recover their losses and the SIPC (Securities Investor Protection Corp.), which may be able to provide partial refunds for some investors, said last week that it may take six months to unravel the complex mess they found in Bernard Madoff’s books.

IRS Revenue Will Drop as a Result

If the $50 billion estimated losses are accurate, the IRS will feel the pinch one way or the other. Some investors stung by Madoff investments may get partial refunds, some may even be forced to pay back fraudulently earned gains, but the massive size of loss associated with this investor fraud case will leave most investors with significant losses. It’s important to recognize that no statements have yet been made by the IRS concerning these losses. Undoubtedly, some taxpayers will attempt to report lost investments related to Madoff as theft losses. Some may even file replacement returns to claim any gain as fictitious income. There are lots of rules that govern each of those options that I’ll not get into here, but suffice it to say that the IRS is going to get hit by this one way or the other. Some experts are estimating this could reduce an already down revenue collection period by another $15 to $17 billion. And that’s on top of the estimated $200 billion tax revenue loss associated with what is now defined as a recession that’s been going on for at least the last 12 months (www.economy.com).

Investor Fraud, Unreported Losses, and IRS Audit Work

Investor fraud is not all that uncommon. What is bizarre about the Madoff case is the size of the loss and the fact that it involves serious players on Wall Street. Normally we see this as a result of small-time hustlers that scam average folks. The fact that high-end investors got taken by Madoff means more attention will get put on investor fraud and scams for at least a little while. The regulatory impact may be substantial much as it was with the Enron and WorldComm debacles. At Tax Masters, we find a surprising number of investor fraud scams and unreported losses when we defend clients against IRS tax audits. You need to know that you are entitled to claim your legitimate losses if you were a victim of investor fraud. There are several ways to obtain refunds of taxes paid using the losses you sustained. There are also several types of losses you can sustain. One option is to file an amended return to eliminate any taxable gains previously reported. This has a three year limitation on how far back you can go. If you have been paying taxes on this kind of Ponzi scheme for more than three years, the situation is more complicated.

Whatever option works best for you to try and minimize your losses in an investor fraud situation, plan on being audited by the IRS. You can be certain that it is highly likely you will be audited when you file any tax return claiming losses associated with this kind of Ponzi scheme. The reason for the audit is not that you are not entitled to claim your losses, but that most people do not calculate their losses correctly. The IRS can and will take aggressive positions with people who prepare their own tax returns in these matters. You can also assume that if you calculated the loss in their favor, they won’t be kind enough to tell you. If your local tax preparer has not prepared this kind of tax return, which is very likely to be the case, you can be sure that he or she also will not know how to handle the IRS audit that will follow.

Tax Masters Has Proven Method for Defending Audits Involving Investor Fraud and Scams

Tax Masters has experience defending IRS audits for people claiming losses from investor Ponzi schemes similar to the Madoff case. We have also observed that the losses were calculated incorrectly in the original returns more often than not. There are several aspects of the loss that most people, including most tax preparation services, fail to account for in determining the amount of loss you are entitled to claim. The methodology of this is beyond the scope of this blog and also somewhat proprietary in that we have developed this method over the course of IRS audits we have handled for our audit defense clients.

Opportunists that scam investors and people who don’t know how to handle this kind of tax matter are out there. Beware. Tax Masters can help. We can help calculate the loss and get you in a position where you face the best possible chance of a favorable outcome in an IRS audit on a Ponzi scheme investment loss.

One more thing on this topic. Tax Masters handles more IRS audits in a week than most CPAs handle in their entire career.

A Final Thought for Those Not Directly Impacted By Investment Fraud, Scam, and Ponzi Schemes

At Tax Masters, we realize the economy is in trouble and we also understand that the timing of the Madoff case could hardly be worse for the IRS, already facing a sizable tax gap and growing revenue shortfalls. We’re afraid that the economic situation and revenue shortfalls will leave the IRS with little choice but to go after dramatically more taxpayers in an effort to gain back revenue. The news last week of the IRS saying they would try to make it easier for homeowners to refinance or sell their homes to pay tax debt went around our office like wildfire. I must admit that our excitement about that possibility is now tempered by the realization that the IRS is going to face ever-increasing pressure to collect more revenue.

If you have tax debt as of today, call Tax Masters for tax representation and get a settlement or payment plan in place sooner rather than later. If you have unfiled returns, you need to seriously consider calling us to get those returns filed before the government contacts you – and they will contact you. The IRS is already increasing notifications and all our intelligence points to more of the same in 2009.

Until you need us,

Patrick Cox, Tax Masters