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So you or someone you know got taken by the famous Madoff, now King of the Ponzi schemes but you do not have a really good Tax Preparer or CPA. Just what do you do now? Do you go back and amend all prior years and reverse all the income you claimed from the fraudulent paper statements you received? What if some of those prior years are “closed” to you now, since they are past the statute of limitations and cannot be changed? Well the IRS is finally here to help. No, really! The IRS published Rev Proc 2009-20. Here the IRS issued safe harbor guidance on how to treat “Ponzi” schemes. Such schemes will be entitled to claim a theft loss under Code Sec 165. In addition, we can review Rev Rul 2009-9 to see that a theft loss is deductible in the year it is discovered. Ok, great, but how do I know how to calculate the loss? The amount of the theft loss deduction includes the amount invested directly with Madoff, less any amounts withdrawn including reimbursements. Importantly the deductible amount also includes any fictitious income that was reported to the investor in years prior to the discovery of the theft that was included in the investor’s gross income, and reinvested in the scheme. Great now what do you do next? To the extent an investor’s theft loss deduction creates or increases a net operating loss in the year the loss is deducted, the investor may carry back up to three years and forward up to 20 years the portion of the net operating loss that is a direct result of the theft loss. Well that sounds simple enough. But, what if you invested in Madoff indirectly? You know the many “feeder” mutual funds Bernie worked with. Well then you have a capital loss. You can only apply the capital losses against capital gains and then take a total of $3,000 per year in losses against other income. The rest of the losses get carried forward. So, now you know! The better lesson is to NEVER deal with anyone who asks you to write a check directly to themselves or a company they control. But you already knew that didn’t you?

Nick Hodges, President of NCH Wealth Advisors, provides US expatriates with the best tools, strategies and planning techniques to help expats manage their tax and financial goals and dreams on a day-to-day basis regardless of their location. To claim your free gift, ExPat Life Portfolio Kit, visit his site at http://www.ExpatCFO.com.