The IRS has provided clarity for fraud victims regarding tax deductions for financial losses incurred from scams.
In a recent memo, the IRS Office of Chief Counsel stated that victims can deduct the tax basis of their losses for the year they discovered the theft.
This guidance allows victims of compromised accounts and phishing scams to claim deductions, while generally excluding romance and kidnapping scam victims.
The memo also highlights the need for reform in tax rules to better support fraud victims, as many still face penalties for early IRA withdrawals.
National Taxpayer Advocate Erin Collins called the memo an important clarification on when and how taxpayers may claim a theft loss deduction while also exposing the gaps in the current law that leave many taxpayers without meaningful relief.