ATLANTA — A bipartisan effort in Congress could provide relief for victims of financial scams who have been hit with large tax bills after losing money to fraudsters.
Channel 2 Action News has reported on victims who lost hundreds of thousands of dollars from retirement accounts to scammers, only to later face tax penalties and bills from the IRS because those stolen funds were withdrawn from tax-advantaged accounts.
Now, lawmakers are moving to change that.
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A House committee unanimously approved legislation aimed at fixing the gap in the tax code.
“Unfortunately, current tax rules require victims to pay tax on their scam-related losses,” said Rep. Jason Smith, a Missouri Republican who chairs the House Ways and Means Committee. “This bill helps make taxpayers whole again by allowing them to deduct the losses incurred by scams.”
The issue dates to changes made under the 2017 Tax Cuts and Jobs Act. Beginning in 2018, many taxpayers who lost money to fraud could no longer claim theft-loss deductions that previously helped offset some of the financial damage.
As a result, victims whose retirement funds were stolen often remained responsible for taxes and early-withdrawal penalties tied to the distributions, despite the fact the money ended up in the hands of criminals.
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“It is important to keep in mind that these people are victims of a crime,” said attorney Courtney Werning, who works with fraud victims seeking to recover stolen funds at Meyer, Wilson, Werning. “They didn’t just take this money out and spend it on vacations, right? This money was stolen from them.”
“Taxing victims on money that was stolen from them is borderline cruel. I have had multiple seniors come to my office hoping that the tax bill was a mistake and that we could fix the situation with casework,” said Representative Jimmy Panetta (D) – CA.
The legislation, known as H.R. 9500, would:
- Waive early-withdrawal penalties on retirement account distributions when the funds were lost due to fraud.
- Restore theft-loss deductions, allowing victims to deduct money stolen through scams and other fraud schemes.
“This will go a long way to helping sort of alleviate that second kick you when you’re down type thing,” Werning said.
As written, the bill would apply only to future tax years. However, lawmakers discussed making the legislation retroactive during committee markup.
If An amendment may be added on the floor of the House to extend the relief to taxpayers affected during the past eight tax years.
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