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September 26, 2023

Is There a “Ponzi Scheme” Button in Turbo Tax For Convenience Purposes?

File this under "serious tax questions" posed to the Intuit community:

Back in 2007 I invested $80,000 into a company for Real Estate develeopment. No property was involved just a written contract. After 5 years and an FBI investigation I have come to the realization that the money is not recoverable. Where in Turbo Tax can I claim this loss? I heard that I can claim up to $3000.00 per year a as a loss. Please advise. Try and de specific as to which form I can claim this on. *******It is still an ongoing investigation so I do not fall under the safe harbor act of the IRS. The person committing the crime has to be charged and convicted**************

Note, nothing on this site should be considered tax advice BUT in the interest of helping out our fellow Americans with questionable tax positions, let's look at this logically (and completely ignore the obvious grammar issues our friendly taxpayer has).

Bernie Madoff changed everything, even if the Service doesn't want to admit as much. An unnamed IRS official told the New York Times back in 2009 that in order for Madoff victims to claim a theft loss "there needs to be some evidence of criminal theft." In the case above, the taxpayer in question is missing the biggest piece of the puzzle, which would be an actual charge. All the investigations in the world mean nothing unless there is actual evidence of theft as opposed to evidence of questionable investment decisions on the part of the taxpayer.

But there is also the issue of claiming this was a "Ponzi scheme" as a true Ponzi would mean the taxpayer was receiving some type of return on investment up unti the moment he or she realized it was a total scam, which apparently was not the case according to a follow-up comment by the OP.

Since taxes aren't our forte, let's turn to TaxGirl's post from March 24, 2009 in which she explains the IRS' position on "Ponzi scheme" losses:

[T]he IRS will allow investors to claim a loss equal to 95% of their investments minus any money received under the scheme or reimbursed as part of the fraud investigation. If there is any additional recovery expected, the IRS will allow a 75% deduction (in a traditional casualty/theft loss, you would deduct the total of the expected recovery). 

Thanks, Kelly.

We still don't know if this taxpayer found the Ponzi scheme theft loss button on Turbo Tax but something tells us it might be wise to recruit an actual tax professional before attempting to DIY this particular loss.

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