ALERT: Tax Refunds Coming – 30 Days and Counting! Are you ready?
Part of a series of articles on planning and safe investing…
Yes, friends, thanks to Mr. Shulman and Company at the Internal Revenue Service, your tax refunds will be coming any day. We’ve heard that several have already received their refunds, and our communications with Internal Revenue confirmed the IRS’ intention to make sure that they complied with the 45 day timeframe normally allotted. This is great news!
Question…What are you planning to do with your refund?
Now, this refund may be only small comfort, given the extent of the financial impact of this horrific scandal. But for many people – dare I say the “lucky ones” – this refund of taxes essentially paid will be dear indeed. Let’s face it – many, if not most Madoff victims are still traumatized, and the economic circumstances of this last year have made victims of many investors who weren’t even invested with Madoff.
The upshot – people are frightened and most don’t want to take risk. They don’t trust their banks. They don’t trust their brokerage firms. They don’t even trust money market funds. They don’t trust that they’ll have enough to live on going forward. This is leaving many immobilized. And many others are still mortified about the prospect of seeing the assets they’ve just received getting “clawed back” by a zealous trustee. I don’t blame them.
Now’s the time to start getting into the swing. It’s time to financially mobilize, and follow Cher’s classic line from the movie “Moonstruck” – “Snap out of it!” I spent some time in an earlier blog on this, but there are a few steps I think you should consider taking right now. The fact is if you’re a Madoff victim, you probably have significantly fewer assets now than you thought you had six months ago. This means you must use what you have wisely. Be as safe as you can be, but you must eat to live. The mattress – or their current equivalents in bank money markets and treasury bills – is probably not your best option, as you won’t even be keeping up with inflation.
This calls for a two step process: putting together a longer term plan based on your income needs and risk tolerance, and right now finding a safe place to park your assets until you get that bigger plan in place that won’t pay you next to nothing in the meantime.
First, where to park the refund when you get it? Until you come up with that bigger overall plan, banks are probably part of the solution. But with most bank money markets yielding less than 1%, that doesn’t help much. Moreover, as of now, banks are only FIDC insured to $250,000 per account type – and that’s just until the end of 2009. So one bank is probably not your answer — spreading the funds out across several banks makes sense, and incorporate some short term CDs paying 2% or so until you’ve come up with an overarching plan. Someone who is totally risk-averse might put some time into researching banks, but for most folks, staying under the FDIC threshold should do the trick.
With our clients (using our Safety-Vest Program), in addition to reviewing bank strength and assets, we’re typically looking at a basket of different conservative assets, such as TIPS (treasury inflation protected securities) and other government agency paper, high quality, short-duration municipal bonds and others. These are available as individual securities, exchange traded funds and mutual funds. These can spruce up yields a good bit. A good financial planner [see Finding the Right Financial Professional]. should be able to help you here if you don’t feel up to the task yourself. Don’t get locked into long term, illiquid investments like insurance annuities until you’ve gotten your bigger picture together.
Next, the bigger picture. Time to, pardon the pun, take stock. If you haven’t done so already, pin down your income needs — start making a list of all your expenses. Figure out what it costs you to live each month. If you happen to be facile with Quicken and a computer, or better yet, have a son or daughter who is an accountant, God bless. For the rest of us, pull out the checkbook, MasterCard statement, and start taking down the information. [for budget forms to help you along, download here]. It will take a couple of evenings. Keep track of your cash outlays for a week – the trip to Starbucks (okay, it’s now Dunkin’ Donuts), lunch at the deli – all the ATM withdrawals. Figure in how many major upcoming outlays you have.
List your remaining assets. Figure in what you’ve got left, what you expect back from the IRS and/or SIPC regarding Madoff. Also, list your liabilities. In other words, your compiling your net worth. Then, sit with your financial planner, or your daughter the accountant, and figure out what it’s going to take. It’s not fun, it’s not pretty. But it is empowering, which at the end of the day, is a good feeling. It is essential.
Risk – lots of people had the capacity to pay for anticipated medical or other expenses when they had Madoff assets to look forward to. Part of the big picture is knowing what insurance protection needs you may now have, and re-evaluating them.
Finally, if you’re like many, you’ll probably want to get some professional help, most likely an objective, non-commission financial planner to help you determine if you’ve got enough to live on, and how best to save and invest it. [Read our post on Finding the Right Financial Professional here]. If you’re subject to clawback, meaning you took money out from Madoff sometime over the last six years, start interviewing attorneys to figure out how best to protect your remaining assets [see finding an attorney]. We know that the Madoff trustee has said that he’s going after those investors who took out more money than they put in, but who he will go after remains up in the air. And the clawback letters that we’ve seen are not particularly kind in spirit.
So there you have it. The money is coming. Three, maybe four steps to take. Why wait? Get started now. That extra 2 or 3% that you could reasonably safely earn over money market yields, the added safety of not being fully invested in one bank are all real benefits right now. Knowing what you need to live on, and having some power over your assets, well, that’s golden.
I am in the same position as Patricia. Filed 10 months ago by my CPA and nothing. The IRS tells me they have everything but they still don’t know which office will process these claims. Has anyone had any luck or tried filing form 911 - Request for Tax Payer Advocate Service Assistance? Is anyone aware of any amended returns being paid? Andrew
We do know that there is quite a backlog in processing NOL Carryback claims (Form 1045). These claims are processed in the same district office as the claims for tax credits for first-time homebuyers, and the volumn of claims are causing delays. Additionally, there seem to be filing issues with people filing 1040 amended returns vs Form 1045. We are being told though that the Taxpayer Advocate Service is helping other victims figuring out what their status is and/or what the holdup is. Information on this service can be found at: http://www.irs.gov
I am still waiting for my refund which my CPA filed last 4/14/09. It is now 11 months later and nothing. The only answer I ever receive is that it is still in the examination dept. Has anyone else been given this run around? Thanks!
A more important question is: if the trustee prevails with his “money in - money” out definition of net equity, will the IRS claw back the refunds already sent??
What about those of us who put money with Madoff (through feeder funds) into IRA’s? What recourse, if any, do we have? An IRA was set up by the government for small business owners as a retirement fund. What protection are we entitled to? Does the government realize how much tax money they have lost by these fictitious accounts?
What are the other victims with IRA’s doing?
In response to Ira Siff:
This is a problem. To use the safe harbor, amended returns are not permitted. If one filed amended returns that the IRS flagged as Ponzi filings they sent letters asking whether one wanted the claim processed. Corrective action had to be taken by May 15,2009. That is the date that amended returns were withdrawn. Future guidance/leeway may be granted if enough pressure is put on the Service by people who failed to comply.
In response to Ira Siff:
I would tell the taxpayer to engage appropriate professionals to help with this situation. Rev Proc 2009-20 provides that “a taxpayer that chooses not to apply the safe harbor treatment of this revenue procedure to a claimed theft loss and that files or amends federal income tax returns for years prior to the discovery year to exclude amounts reported as income to the taxpayer from the investment arrangement must establish that the amounts sought to be excluded in fact were not income that was actually or constructively received by the taxpayer.” This may be difficult to prove. Therefore, the taxpayer may want to re file under the safe harbor. However, the view the IRS will take is uncertain.
I am so confused and very nervous about IRS. My mother filed her amended 05, 06, 07 returns for capital gains in January, the normal way one might have before Madoff, if one had paid capital gains wrongly. She got her 3 refunds within a month and a half. My accountant did the same exact thing after conferring with her accountant and waiting for an official IRS policy, which was not forthcoming. We filed in mid-March. All three of my returns were greeted with a form letter and instructions for “Ponzi Scheme” filing. We had alsready filed for “theft loss” for 2008, and I reveived my refund, BUT just for 2008. Now those other three years of taxes paid, amounting to about $30,000 are sitting in limbo, because, as my accountant tells it, the forms and method insisted upon by the IRS does not apply to capital gains tax wrongly paid for three years. While the same method yielded the correct refund for my mother, I’m stuck with nothing but an insistance to re-file in a way confusing to my accountant. Naturally, I need this refund. And am entitled to it. What to do?