Ponzi Victims Will Be Tax Nightmare for IRS

Service expects to refund $7-$10 billion in taxes paid on fake income
By Nick McMaster,  Newser Staff
Posted Mar 13, 2009 12:06 PM CDT
Bernanrd Madoff arrives at federal court in New York Thursday, March 12, 2009.   (AP Photo/Mary Altaffer)
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(Newser) – The work of fraudsters such as Bernie Madoff and R. Allen Stanford will complicate the IRS’ job as tens of the thousands of victims attempt to reclaim taxes paid on income that went up in smoke, Time reports. The IRS estimates that refunds due victims to Madoff alone could total up to $10 billion, but the agency has yet to issue clear guidelines for recouping funds.

The service is likely to advise Ponzi victims to file a “Theft Loss” deduction, which allows them to reclaim taxes paid over the last three years. However it works out, Time points out that the IRS doesn't deserve too much sympathy about cleaning up the mess: after all, it's been collecting taxes on phantom money for 20 years now.

(Read more IRS stories.)