People who lose money to fraud can face another damaging financial consequence after the theft: a federal tax bill tied to money they no longer possess.
Federal rules have sharply limited the ability of scam victims to deduct personal theft losses since 2018. The restriction originated in the Tax Cuts and Jobs Act of 2017 as a temporary provision, but legislation enacted in 2025 made the change permanent. As a result, whether a victim receives tax relief can depend heavily on the type of scam involved and why the money was transferred.
An IRS memorandum issued in March 2025 clarified that certain losses connected to profit-seeking transactions may qualify for a theft-loss deduction. This can include investment fraud when the victim transferred money with the intention of generating a return.
The same relief generally does not apply to personal scams without a profit motive, including many romance, impersonation and false-kidnapping schemes. In those situations, victims can lose their savings without receiving a corresponding federal deduction.
Retirement-account withdrawals can make the consequences even more severe. A victim who removes money from a traditional 401(k) or individual retirement account and sends it to a fraudster may still owe ordinary income taxes on the distribution.
When the account holder is younger than 59½, the withdrawal may also trigger a 10% early-distribution penalty. That can leave a person owing taxes and penalties on retirement money that was stolen before it could be used.
A bipartisan proposal in the House of Representatives seeks to change those rules. The Tax Relief for Fraud Victims Act, designated H.R. 9500, would restore broader deductions for personal casualty and theft losses while providing additional protections for people whose retirement funds were taken through fraud.
Matthew Roberts, a tax attorney and partner at the Dallas firm Meadows Collier, described the current inability to claim a theft deduction as an especially harsh result for victims already recovering from fraud.
The House Ways and Means Committee approved an amended version of the proposal on July 1 by a unanimous 39-0 vote. The legislation was ordered favorably reported to the full House, although lawmakers had not established when—or whether—the entire chamber would consider it.
The push for tax relief comes as reported fraud losses continue rising at a dramatic pace.
Consumers reported losing a record $15.9 billion to fraud during 2025, according to Federal Trade Commission information cited in the report. That represented an increase of approximately 27% from the $12.5 billion reported in 2024. Compared with 2020, reported losses had climbed by nearly 430%.
Imposter scams generated the greatest number of fraud reports in 2025. Approximately 1 million people submitted reports involving that type of scheme.
Around 80% said they did not lose money. However, the remaining 20% collectively reported approximately $3.5 billion in losses. Investment-related scams produced the largest dollar losses of any category, exceeding $7.9 billion.
The increase has been driven partly by a growing number of victims reporting losses of at least $100,000. Those devastating six-figure losses have been especially common among people who are 60 or older.
Clark Flynt-Barr, AARP’s government affairs director for financial security, said such losses frequently occur because victims are persuaded to cash out retirement accounts. Once that happens, the money can be transferred to criminals while the withdrawal remains visible to the IRS as taxable income.
Among adults 60 and older, reported losses of $100,000 or more totaled approximately $1.6 billion in 2024. Those cases represented 68% of the $2.4 billion that members of the age group reported losing that year, according to an FTC report to Congress released in December 2025.
Before 2018, taxpayers could generally itemize unreimbursed personal casualty and theft losses, subject to several limitations. One important threshold allowed a deduction only for the portion of the loss exceeding 10% of the taxpayer’s adjusted gross income.
The Tax Cuts and Jobs Act changed that system by generally limiting personal casualty and theft deductions to losses connected with federally declared disasters. The restriction was initially scheduled to cover the 2018 through 2025 tax years.
The provision was later made permanent, while eligibility was broadened to include certain state-declared disasters. Ordinary fraud victims nevertheless remained outside the deduction unless their circumstances fit another section of the tax code.
Investment scams can receive different treatment because the victim entered the transaction seeking a profit. Under IRS guidance, a financial-scam loss may be deductible when the conduct qualifies as theft under applicable state law, the victim has no reasonable expectation of recovering the money and the transaction was entered into for profit.
That distinction can create outcomes in which two victims suffer similar financial devastation but receive very different tax treatment based on the scammer’s stated reason for requesting the money. Flynt-Barr said the system effectively requires people to have been targeted by the correct category of fraud to receive relief.
H.R. 9500 would remove the disaster-related restriction for personal casualty and theft losses. Supporters say restoring the deduction would allow victims to subtract eligible stolen amounts from taxable income, reducing much of the additional tax damage caused by the fraud.
The legislation would also give victims greater flexibility in choosing when to recognize a qualifying theft loss. Under current law, theft losses are generally deducted in the year they are discovered, unless there remains a reasonable possibility that the money will be recovered.
The proposal would permit certain taxpayers to elect to apply the deduction to the year in which the theft occurred rather than only the year in which it was discovered. Victims would also receive additional time to seek a refund, with the filing period generally remaining open until one year after the loss was discovered.
That timing can matter greatly for retirees. Someone who withdrew and lost a large retirement balance may have reported substantial taxable income during the year of the withdrawal but have little taxable income in the later year when the fraud was finally uncovered.
Applying the deduction only to the discovery year may therefore provide little practical benefit. Allowing the victim to amend the earlier return could more directly offset the income generated when the stolen retirement money was withdrawn.
The bill would also waive the 10% early-withdrawal penalty when a qualifying retirement-plan distribution was connected to theft involving fraud, deceit or misrepresentation.
In addition, victims would be permitted to repay eligible withdrawn amounts to their retirement plans. The proposed rules would give an affected person a one-year repayment period beginning after the fraud was discovered, helping the victim rebuild savings without being blocked by ordinary annual contribution limits.
The legislation would not automatically recover money from criminals, and it would still need approval from the full House, the Senate and the president before becoming law. Its supporters argue, however, that the government should not compound a victim’s financial destruction by taxing stolen retirement money and denying relief solely because the fraud did not fit the current law’s narrow requirements.
Source: CNBC
