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Treasury Inspector General for Tax Administration

Press Release

November 23, 2011
TIGTA - 2011-83
Contact: David Barnes
(202) 622-3062

TIGTA Report: Many Investment Theft Loss Deductions Appear to be Erroneous

WASHINGTON – Taxpayers may have erroneously claimed deductions of more than $697 million a year in investment theft losses that did not appear to qualify as such, resulting in revenue losses to the U.S. Government totaling more than $41 million, according to a report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).

Federal law, along with associated regulations, procedures, and rulings, provides taxpayers with tax relief for investment theft losses. The Internal Revenue Service (IRS) estimates that more than 19,200 taxpayers filed Tax Year 2008 tax returns claiming a combined total of more than $8 billion in property income casualty and theft loss deductions.

TIGTA conducted its review to assess the IRS’s efforts to ensure the validity of investment theft loss deductions. The number of investment theft loss victims as a result of Ponzi schemes increased significantly in Tax Years 2008 and 2009. With the potentially large number of victims filing tax returns claiming these losses, IRS officials issued guidance to minimize both its administrative burden and the burden on the victims of these schemes, which are investment frauds that involve the payment of fictitious investment returns to existing investors from funds contributed by new investors.

Based on TIGTA’s review of a statistically valid sample of 140 electronically filed Tax Year 2008 tax returns on which taxpayers reported an investment-theft loss deduction, TIGTA estimated that 1,788 (82 percent) of 2,177 taxpayers may have erroneously claimed deductions totaling more than $697 million, resulting in revenue losses totaling approximately $41 million. The potential revenue loss estimate was conservative in that it only represented electronically filed tax returns for one year.

“The IRS did a good job of addressing the tax implications of Ponzi scheme losses and providing guidance to affected taxpayers. However, our review identified that some taxpayers may be erroneously claiming investment theft loss deductions,” said J. Russell George, Treasury Inspector General for Tax Administration. “Revenue losses associated with potentially erroneous deductions could be substantial,” he added.

TIGTA made four recommendations in its report; IRS management agreed with TIGTA’s recommendations and stated that they plan to take appropriate corrective actions.

Read the report.


Note: The difference between the date TIGTA issues an audit report to the Internal Revenue Service and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with Federal confidentiality laws.

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