Tax Series with Ed Zollars: Scam Loss Deductions Under IRC Section 165: Did Your Client Fall for a Preferred Fraud Under the Law? (D0-E2507224)

The TCJA has largely suspended deductions for personal theft losses for tax years 2018 to 2025, making the proper classification of a loss under IRC §165(c)(2) as arising from a “transaction entered into for profit” the primary avenue for deductibility for many victims. This program will drawi on foundational principles, specific theft loss rules, the impact of the TCJA, and crucial IRS guidance like Chief Counsel Advice (CCA) 202511015 and the Madoff framework. Topics include the following:

• Foundations of loss deductions under IRC Section 165: General Rules and Limitations for Individuals (§165(a), §165(c))
• Defining "theft" for tax purposes and its broad interpretation for scams
• Timing of theft loss deduction: The Discovery Rule (§165(e)) and the "No Reasonable Prospect of Recovery" Standard
• Calculating the amount of deductible theft loss
• Profound impact of the TCJA (§165(h)(5)) on suspending personal theft losses and the limited exceptions
• In-depth analysis of the critical "Transaction Entered Into for Profit" Test (§165(c)(2)) post-TCJA
• Navigating IRS guidance: Key insights from CCA 202511015 differentiating deductible investment scams from non-deductible personal scams (e.g., romance, kidnapping)
• Understanding the Madoff Framework (Rev. Rul. 2009-9, Rev. Proc. 2009-20, Rev. Proc. 2011-58) for Ponzi schemes, including the optional safe harbor and its limitations for newer scam types
• Practical considerations for CPAs: Determining the discovery year, documenting no reasonable prospect of recovery, meeting stringent substantiation requirements, and proper reporting on Form 4684