June 16, 2024

The Unanticipated Tax Nightmare of a Scam victim

In 2023, a woman in Whitefish Bay, Wisconsin was subjected to an intricate scam which cost her entire savings. To add insult to injury, she found out that a substantial amount of her lost funds were also subject to tax.

Kaitlin Henze, the scam victim, meticulously examined the receipts and gift cards tied to the scam. These represented a mere fraction of the financial loss she incurred due to the fraudulent scheme.

Henze explained that the scammers convincingly forged government documents to manipulate her into believing they were representatives from Wells Fargo and the Federal Trade Commission. She was led to believe her financial security was endangered, resulting in her paying funds to secure her assets which were instead siphoned off by the scammers.

In total, Henze was defrauded of over $200,000, a significant portion of which was taken from her 401k. Left in a financially precarious situation, she feared she may be at risk of defaulting on her mortgage and other bills.

Now, to make matters worse, Henze is faced with tax bills amounting to approximately $15,000 for the IRS and around $7,500 for the state of Wisconsin. These taxes are a result of the money withdrawn from her 401k and investment accounts, which is subject to tax regardless of the fact it was lost in the scam.

According to tax attorney Robert Teuber, under former regulations, scam victims could apply for a theft loss deduction on their federal tax return. However, this provision was abolished in the Tax Cuts and Jobs Act of 2017.

Attempts can be made to contest the tax balance but involve a filing fee and are no guarantee of success. While Wisconsin does offer reduced tax liability in certain cases, it doesn’t apply to theft loss, leaving Henze, and many others enduring double victimization.

Despite her unparalleled financial setback, Henze has managed to retain her home but indicates the tax bills are a devastating blow. Her current plan is to gradually repay her taxes and subsequently cover the interest, until she can completely settle her bills.

Frequently Asked Questions

Why are scam victims charged taxes on lost money?

Scam victims are generally required to pay taxes on money if they withdrew it from accounts that are taxable, such as a 401k or investment accounts. There are usually no deductions available for money lost in scams.

Could victims apply for a theft loss deduction in the past?

Yes, before the Tax Cuts and Jobs Act of 2017, victims of a scam could apply for a theft loss deduction on their federal tax return.

What recourse does a scam victim have against tax liability?

Scam victims can attempt to contest their tax balance, but success is not guaranteed and there are associated filing costs. In some cases and in some jurisdictions, they can apply for a reduced tax liability for other reasons, but these cases are limited and often don’t apply to scam victims.