Madoff Help News & Assistance

REVISED 3/09

The good news is that you may be able to recoup some of your losses and recent IRS guidance makes the process much easier than before. The bad news: while less murky and complicated, the IRS is not happy about investors that might choose not to take them up on their offer. (read on)

Thankfully, as expected, the IRS has finally come around to providing some guidance on several of the key issues that were making Madoff victims even more frantic. While they’re not rushing to make investors whole, they’ve taken a rather lenient and compassionate approach, and one that benefits investors and IRS agents alike. That said, you’ll most likely want the input of an accountant or tax attorney to see if the recent IRS “Safe Harbor” ruling is the best approach for you. This tax refund provides many, though not all investors some relief in addition to SIPC claims (see “How to file a SIPC Claim”).

In brief, the IRS has taken the position that the investors of all investment frauds (not just Madoff) will be given an opportunity to take a theft loss deduction for the value of the most recent investment statement that taxes have been paid on. That’s big. This mean that the deductible amount will include not just the initial investment, additional paid-in amounts, but income accrued that taxes have been paid on. This means that investors may get a refund essentially equal to the tax rate times the value of their December 31, 2007 statement minus their expected SIPC refund, if any.

Moreover, the IRS has also indicated that the investor can amend returns going back as far as 5 years – instead of just three. This means that the investor can establish that the loss took place in 2008, deduct the loss in 2008, and if the loss exceeds the 2008 income, roll the unused loss back to 2007, then 2006, etcetera, to 2003. Whatever loss is not used up going back to 2003 can be used going forward for 20 years.

Finally, the IRS has made it clear that they won’t be very demanding of documentation: the poor investor need not find copies of initial deposit or withdrawal checks, tax returns, or years of investment statements. The 12/31/07 and 11/30/2008 statements will most likely suffice, along with completion of some relatively simples forms.

So what’s the rub? The IRS is also making it clear that the they don’t encourage investors using “claim of right” actions (requesting refunds of taxes paid on Madoff “income” going back indefinitely). They want you to take the Safe Harbor – less administrative work for them by a long shot. This means that the higher taxes rates that investors paid in the ‘80s and ‘90s will not be factored in. It also means that if investor losses exceed income for the last five years, and if investors don’t have much income going forward they may not get to realize the full benefit of their theft loss. Of course, if you’ve paid taxes on monies taken out from the account, you won’t be entitled to a refund of those taxes.

Timing is critical, however, and the Statute of Limitations, which limits how far back an investor can seek a refund means investors should move quickly. Many accountants are recommending filing a protective claim right away for 2003 April filers who do wish to rush their 2008 returns.

Unfortunately, the new tax guidance does not apply to IRAs, retirement plans and charities. The general interpretation for retirement plans is that Madoff losses would not qualify for the theft loss deduction as investors never paid taxes on this income.

For indirect investors in Madoff – those who invested via feeder funds and hedge funds – the losses can be taken but must be passed through the investment entity. Contact your feeder or hedge fund administrator for the information you’ll need for the deduction.

In any case, talk to your accountant. Get your protective claims in, and all the while, expect that whatever you’re being told now regarding the tax issue stands a good chance of being changed!

For more information, go to “New: IRS Tax Refund Procedures!”.

Ron Stein