They say lightning doesn’t strike twice—unless you’re a scam victim and the IRS wants a piece of what you lost.
In this publication, we're diving into a little-known financial double whammy: how online scam victims often face a surprise tax bill on top of losing their life savings—and how new IRS guidance might finally offer a lifeline. Let’s break it down.
Victims of sophisticated scams have been paying taxes on money they no longer have.
New IRS guidance says certain scams now qualify for tax deductions—finally giving relief to people who lost funds from schemes they thought were investments.
How the Scam (and Tax Mess) Works:
- The Scam: Victims are tricked into moving money from retirement or investment accounts into what they believe are secure or profitable opportunities—like crypto platforms, investment apps, or safe “holding” accounts.
- The Trap: Scammers clean out the funds, and the victim is left with nothing.
- The Shock: Because the funds were pulled from taxable accounts, victims still get hit with a tax bill—often in the tens or hundreds of thousands.
- The Update: As of March 14, the IRS now says some of these cases qualify for a theft loss deduction if the money was moved under a “profit motive.”
Who’s Being Targeted:
- Older adults with retirement accounts
- Crypto investors drawn in by fake apps and too-good-to-be-true returns
- Everyday taxpayers who fall for impersonation scams (like “fraud investigators” from their bank)
Basically, anyone with assets is fair game for these fraudsters—and that includes people just trying to protect or grow their savings.
Real-Life Example:
One scenario now covered under the IRS guidance: A scammer posing as a bank fraud analyst convinces a victim to move their retirement funds to a “safe account” to prevent a hack. The money vanishes. Since the victim believed they were safeguarding funds to reinvest, that intent qualifies as a profit motive—and now, a tax deduction is possible.
“This opens the door,” said James Creech, director at Baker Tilly. “You can take the memo to your auditor and have a real shot at relief.”
Also now eligible:
- Pig butchering scams (fake crypto platforms with vanishing accounts)
- Phishing scams that lead to account takeovers via fake fraud agents
Not eligible:
- Romance scams where victims pay out of love, not for profit
- AI voice scams posing as kidnapped grandkids (yes, that’s a thing)
Why You Should Care:
You could be on the hook for taxes on money that was stolen. Imagine losing $80,000 to a scam, then getting slapped with a $20,000 tax bill because you withdrew the money from your 401(k) or IRA.
With the IRS now recognizing “profit-motivated fraud losses,” there’s finally a path to soften the financial blow—if you know how to navigate it.
But act fast. These rules only apply under current tax law, which is set to expire after 2025 unless Congress acts.
How to Protect Yourself:
- Keep documentation. Create a timeline of the fraud, save screenshots, and file a police report immediately.
- Report it. Submit complaints to the FBI’s Internet Crime Complaint Center (IC3) and notify your bank or financial institution.
- Consult a tax professional. They can help determine if your case qualifies under the new IRS guidance.
- Act before you file. If you’re claiming a theft loss deduction, make sure your paperwork is solid before you submit.
- Know what qualifies. Only scams involving intent to profit are eligible—paying a fake lover’s bills? Sadly, still on you.
Quick Tips & Updates:
Quick Tip #1: Did you know? IRS theft loss deductions only apply if you itemize your deductions and meet the adjusted gross income threshold.
Pro Tip: If you’ve been scammed, don’t assume the IRS sees it your way. Documentation is everything—screenshots, police reports, emails, even bank statements.
Stay safe, stay informed.
Keywords Defined:
- Theft Loss Deduction: A tax deduction for money or property lost due to theft. Requires proof and intent to profit.
- Pig Butchering Scam: A long-term con where victims are lured into fake investments, often in crypto, only to lose everything.
- Profit Motive: The intention of gaining financial benefit from a transaction. Required for tax relief eligibility.
- Phishing Scam: A fraudulent attempt to obtain sensitive info (like login credentials) by disguising as a trustworthy entity.
- Itemized Deduction: A tax deduction method where taxpayers list eligible expenses instead of taking the standard deduction.
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