Scams don’t just target the uninformed, they’re increasingly sophisticated and often go after those trying to protect what they’ve worked hard to build. While this issue may show up more in your personal life than your practice, it’s important to know that the IRS has issued new guidance that could help you – or a loved one – recover financially after falling victim to a scam.

This is especially relevant for older individuals, who are often targeted with schemes involving retirement accounts, fake investment opportunities, or impersonations of government agencies.

What’s New

In a recent IRS memo, the agency clarified when theft losses from scams may be tax-deductible. While the 2017 Tax Cuts and Jobs Act limited most personal theft loss deductions to federally declared disasters, there’s an exception that could apply if the loss occurred in a transaction with a profit motive.

What Counts as a Profit Motive?

If you moved money with the intention of protecting or growing your financial assets, for example transferring retirement funds to what you believed was a secure account, you may have a legitimate case for claiming a deduction. Some examples include:

• Moving money to avoid fraud and safeguard your savings
• Investing in what you thought was a legitimate opportunity with a promised return
• Being misled into wiring funds under the impression your accounts were at risk

These types of scenarios show a profit motive, which is key to claiming a theft loss deduction.

What Doesn’t Qualify

Unfortunately, losses tied to scams involving purely personal situations – such as fake romances, medical emergencies, or charitable appeals – don’t meet the IRS’s profit motive test and generally are not deductible.

What You Need to Know

• You don’t have to be wealthy to benefit from this guidance. Even modest losses may qualify.
• Keep your records, because communications, account transfers, and timelines matter.
• Act in the year you discover the loss, not necessarily when it happened.
• File using IRS Form 4684 and include it with your tax return.

When to Reach Out to Us

If you or someone close to you has been scammed, particularly if retirement funds were involved, contact us as soon as possible. You may be facing unexpected tax obligations, and proper documentation and filing could help reduce your burden or even result in a refund.

Scams are emotionally and financially devastating. While this guidance won’t reverse the damage, it does offer a small path toward financial recovery, especially for those trying to protect the assets they’ve worked so hard to build.