Rev. Proc. 2009-20 provides a safe-harbor method for Ponzi Scheme.  If a qualified investor with a qualified loss follows the procedures described in the revenue procedure, the Service will not challenge:

• The treatment of a qualified loss as a theft loss;
• The tax year in which the theft was discovered; and
• The amount of the deduction.

If you are a qualified investor with a qualified loss defined in Rev. Proc. 2009-20, then follow the steps below for the Ponzi Scheme losses reporting:

1. Find the discovery year:

A qualified investor’s discovery year is the taxable year of the investor in which the indictment, information about the losses or complaint towards the lead figure of the investment company is filed. The Ponzi Scheme losses will be reported in the discovery year. If you already filed that year’s tax return, you can amend the return for a refund. 

2. Determine the loss amount:

The amount of your loss is generally the total amount of money you invested in the Ponzi scheme that you did not recover, minus any amounts you may have received back. If you receive the reimbursement after the discovery year, then you report it as an income in the subsequent years when you receive the reimbursement.

3. Report Theft loss deduction

• Ponzi scheme losses are deducted under IRS rules for casualty and theft which is reported on Schedule A (Itemized deductions) of Form 1040.
• Form 4684 is used to calculate the theft loss, then report the net loss on Schedule A (Itemized deductions) of Form 1040.
• Rev. Rul. 2009-9 provides the calculation of the Ponzi losses, which gives a special treatment for Ponzi Scheme Losses. The Ponzi loss as an itemized deduction is not subject to personal loss limits in Section 165(h) or the limits on itemized deductions in Section 67 and Section 68. 

Key Resources:

• Rev. Proc. 2009-20
• Rev. Rul. 2009-9

Tax Professional Help:

• Given the complexity of Ponzi schemes and the potential for lost deductions or incorrect filings, it’s a good idea to consult with a tax professional, especially if the amount of the loss is significant or if you need help with filing amended returns for prior years.