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Navigating the tax implications of scams and theft losses can be complex, especially considering legislative changes that generally limit casualty and theft losses to those associated with a disaster. However, if you’ve fallen victim to a scam, there is still an important tax avenue available for you.

Traditionally, under tax law, you could deduct theft losses if they weren’t covered by insurance. But while the law changed a few years ago, tightening restrictions and limiting deductions primarily to disaster-related losses, there’s still hope. The tax code recognizes that if you were scammed while engaging in a transaction with a profit motive, you might still be eligible to claim a deduction.

Internal Revenue Code Section 165(c)(2) caters specifically to losses incurred from profit-driven activities. This means if your financial losses from a scam were tied to an endeavor intended to generate profit, you might deduct these losses, without needing a disaster declaration. Understanding this exception can be a crucial lifeline, allowing you to reclaim some financial relief from the losses you’ve endured due to deceitful scams.

Eligibility Criteria for Profit-Driven Casualty Losses: For a theft loss to qualify under the profit-motivated exception, several stringent criteria must be met:

1. Profit Motive: The primary intention of the transaction must be to achieve economic advantage. The IRS requires clear evidence that the transaction had a bona fide profit expectation. Case law and IRS rulings substantiate the necessity of this objective, often requiring substantial documentation to support the profit intent.
2. Type of Transaction: Eligible transactions commonly include traditional investment vehicles such as securities, real estate, or other income-generating activities. The lack of a profit motive typically disqualifies social or personal activities from this deduction space.
3. Nature of Loss: The loss must stem directly from the transaction aimed at profit. This correlation should be clear and demonstrable through financial records and legal documentation. For instance, investment scams or fraudulent financial schemes targeting taxpayer investments often qualify if they meet the profit criteria.

Application of IRS Guidance: The application of the deduction frequently necessitates analyzing IRS memoranda and rulings for clarity on what constitutes a deductible loss. A recent IRS Chief Counsel Memorandum (CCM 202511015)has further elucidated scenarios where such losses are deemed deductible:

• Investment Scams: These are classic examples where losses, though fraudulent in nature, can be deemed deductible if the initial investment was made with a credible expectation of profit. Taxpayers must validate the transaction’s legitimacy and profit intent using documentation such as communications with the scammer, investment contracts, and proof of monetary transfer.
• Theft Losses: Profit-driven theft is uniquely scrutinized. The IRS insists that these losses must manifest in a transaction inviting profit, not merely in personal engagements like casual lending between acquaintances.

Some Not So Good Tax Ramifications: Being scammed out of your IRA or tax-deferred pension funds can have significant tax implications, depending on whether the account was a traditional or Roth type.

In the case of a traditional IRA or tax deferred retirement plan, funds withdrawn prematurely due to a scam are generally considered taxable income. This means the entire amount withdrawn is added to your taxable income for the year, potentially bumping you into a higher tax bracket and increasing your tax liability. Additionally, if you are under 59½, these withdrawals might also be subject to a 10% early withdrawal penalty, further compounding the financial stress.

Conversely, a Roth IRA or Roth qualified plan withdrawal is less punitive in terms of immediate tax consequences, as contributions were made with after-tax dollars. Generally, provided your account has met the five-year holding rule, contributions can be withdrawn tax-free and penalty-free. However, if earnings are withdrawn prematurely and not for a qualifying reason, they may be subject to taxes and penalties.

The following examples illustrate when a scam or theft will or will not qualify for a casually loss and the tax consequences. Generally, the stolen funds are transferred overseas and are irretrievable without a reasonable prospect of recovery, one of the qualifications for a personal casually loss.

Example 1: Impersonator Scam – Qualifies as Personal Casualty Loss

Taxpayer 1 fell victim to a sophisticated scam involving an impersonator claiming to be a “fraud specialist.” The scammer falsely informed Taxpayer 1 that their accounts were compromised, inducing Taxpayer 1 to transfer funds from both IRA and non-IRA accounts into what were purportedly new, secure investment accounts. However, these were controlled by the scammer, who funneled the money into an overseas account.

The key to this scenario being deductible lies in the taxpayer’s intent. Taxpayer 1’s motive was to safeguard and reinvest funds, clearly manifesting a profit-oriented intention. Consequently, the scam losses qualify as a theft loss since they were incurred in a transaction entered for financial gain.

Tax Implications: 

a.   If the taxpayer can itemize deductions, the loss is deductible on Schedule A.

b.   However, the taxpayer is taxed on the traditional IRA distributions, and must recognize the gain or loss on the non-IRA account. In addition, if the taxpayer is under age 59.5 the 10% early distribution penalty for traditional IRAs applies, for which there is no specific exception.

c.   If the taxpayer has sufficient resources, other funds can be rolled back into the IRA within 60 days from the date withdrawn, and b. and c. would not apply to the extent of funds rolled into the IRA. 

Example 2: Romance Scam – Non-Qualifying Personal Casualty Loss

Taxpayer 2 became ensnared in a romance scam, believing they were in a genuine relationship with an impersonator. Persuaded by a fabricated story about a relative needing medical help, Taxpayer 2 transferred funds from IRA and non-IRA accounts, into an overseas account controlled by the scammer. The funds were meant to assist another person, rather than seek profit.

The critical distinction here is the absence of a profit motive. The transactions were embarked upon out of personal sentiment and misled compassion, lacking any financial investment intent. Consequently, these losses are classified as personal casualty losses under Section 165(c)(3), which are non-deductible absent a federally declared disaster or qualifying personal casualty gains.

Because the losses do not meet the criteria for profit-driven transactions, the taxpayer’s losses are not deductible.

Tax Implications: 

a.   No casualty loss deduction allowed.                        

b.   However, the taxpayer is taxed on the traditional IRA distributions, and must recognize the gain or loss on the non-IRA account. In addition, if the taxpayer is under age 59.5 there is a 10% early distribution penalty for traditional IRAs for which there is no specific exception.

c.   If the taxpayer has sufficient resources, other funds can be rolled back into the IRA within 60 days, and b. and c. would not apply to the extent of funds rolled into the IRA. 

Example 3: Kidnapping Scam – Non-Qualifying Personal Casualty Loss

Taxpayer 3 was the victim of a kidnapping scam involving an impersonator. The scammer contacted the taxpayer by text and phone and claimed to have kidnapped the taxpayer’s grandson for ransom. The taxpayer demanded to speak to the taxpayer’s grandson and heard his voice over the phone begging for help.

Scammer directed Taxpayer 3 to transfer money to an overseas account and not to contact law enforcement. The taxpayer did not realize that the scammer had used artificial intelligence to clone the grandson’s voice and that no kidnapping had taken place.

Under immense duress, Taxpayer 3 authorized distributions from an IRA account and a non-IRA account, then directed those funds to be deposited in the overseas account provided by the scammer, hoping to ensure the safety of the grandson.

Later Taxpayer 3 was able to contact the grandson and learned that no kidnapping had taken place and immediately contacted law enforcement and their financial institution, but was informed that the distribution to the overseas account could not be undone and there was little to no prospect of recovery.

The taxpayer’s motive was not to invest any of the funds distributed from the IRA and non-IRA accounts but, rather, to voluntarily transfer the funds to the scammer, albeit under false pretenses and duress. Notwithstanding the fraudulent inducement and duress, Taxpayer 3 did not have a profit motive; therefore, the losses were NOT incurred in a transaction entered for profit and therefore not tax deductible.

Tax Implications: Same as example #2.

Implications: These examples emphasize the importance of critical assessment of the intent and transaction nature when determining if a scam-related event is a deductible casualty loss.

• Documentation and Intent: Individuals should maintain clear intent documentation, prominently in investment contexts, to support future claims of profit motive.
• Scrutiny and Compliance: Enhanced IRS scrutiny of non-disaster casualty losses necessitates meticulous compliance, with auditors keenly differentiating between qualifying and non-qualifying losses.

It is crucial to consult with De Boer, Baumann & Company if you receive questionable or unsolicited texts, emails, or calls, especially before authorizing any fund transfers or account withdrawals. Our team can provide practical guidance on fraud detection, documentation, and next-step decision-making if you suspect a scam.

It is also important to educate family members, particularly older adults who are frequently targeted, about these risks and common tactics. Encouraging them to reach out early can help prevent losses and provide support if a situation escalates. A proactive approach can protect assets, reduce disruption, and provide peace of mind.

Most people think their financial professional focuses on the past: last year’s tax numbers, last quarter’s profit, last month’s expenses. That’s the compliance world. It’s essential, of course. But it’s focused on what has already happened.

Advisory is something different.
Advisory is about shaping what comes next.

It’s a shift from “Here’s your report” to “Here’s how we reach your goals.” From reacting to numbers to intentionally influencing them. And if you’ve ever wished money felt less uncertain — or wished for a clearer path toward the life or business you want — advisory may be the upgrade you didn’t know was available.

Why Compliance Alone Leaves People Stuck

Compliance keeps you accurate. Advisory keeps you moving forward.

Most individuals and business owners only see the backward-facing side of financial work. That’s why they often run into patterns like:

• Finding out their tax bill when it’s too late to change it
• Making big business decisions without a roadmap
• Setting goals without the structure to reach them
• Reviewing profitability rather than designing profitability
• Feeling like money is unpredictable rather than manageable

These aren’t failures. They’re symptoms of operating with historical data instead of a future-focused strategy.

So… What Exactly Is Advisory?

Advisory is an ongoing, collaborative process that uses forward-looking insights to help you make smarter financial decisions, reduce stress, and progress toward long-term goals.

There are two main types that many people find the most helpful.

1. Tax Advisory

Tax advisory is proactive tax planning — the strategies, timing, and decision-making that help reduce future tax obligations before a return is ever filed.

It tackles questions like:

• “What steps can I take this year to lower my tax bill next year?”
• “Should I consider a different business structure as I grow?”
• “How do I plan for capital gains, retirement withdrawals, or rental income?”
• “What tax strategies apply if I start or sell a business?”

Tax advisory shifts the focus from reporting taxes to designing tax outcomes.

2. CFO Advisory

CFO advisory focuses on the financial direction of your business — not just what happened, but what’s possible.

It helps you explore questions such as:

• “How much cash will I actually have in three or six months?”
• “Does our pricing support the level of profit we need?”
• “Are we ready to hire, or should we outsource a little longer?”
• “What would it take to expand, open a new location, or launch a new service?”
• “How do we build a budget that reflects our goals instead of just our costs?”

CFO advisory gives you a clearer view of how decisions today shape results tomorrow.

It’s not bookkeeping. It’s strategic guidance.

Compliance vs. Advisory: A Clearer Comparison

The difference isn’t only in services — it’s in mindset. Compliance is about clarity. Advisory is about progress.

Who Benefits the Most From Advisory? Business Owners

Whether you’re just starting or scaling, advisory helps with pricing, cash flow, hiring decisions, profit margins, budgeting, and long-term growth planning.

Individuals With Complex or Growing Financial Lives

Side gigs, rental properties, investments, stock compensation, and multi-source income all benefit from proactive planning.

People Approaching Major Life or Financial Milestones

Retirement, business sales, home purchases, expansions, or college planning often require a long runway to optimize outcomes.

Anyone Who Wants More Control and Less Guesswork

If you want financial clarity instead of surprises, advisory gives you structure and strategy.

The Key Benefits: Why Advisory Pays Off

Advisory often delivers a measurable return on investment because it directly influences taxes, cash flow, and long-term wealth building. The most common benefits include:

1. Better Tax Outcomes Year After Year

Planning ahead opens the door to legal, strategic tax advantages you simply can’t access at filing time.

2. A Clear, Actionable Financial Plan

You’re no longer guessing. You know the steps required to reach your goals — and you have support following them.

3. Improved Profitability and Cash Flow

Businesses often discover hidden profit leaks and inefficiencies that can be corrected quickly.

4. More Confidence in Decisions

You gain clarity on the financial impact of every major move before you make it.

5. Faster Progress Toward Your Milestones

Whether you want to expand your business, retire early, or grow wealth, advisory accelerates the path.

6. A Collaborative Relationship Focused on Your Wins

Instead of one annual meeting, you get a strategic partner committed to helping you move forward throughout the year.

Is Advisory Right for You?

If you want more clarity, more control, more intentional financial planning — and fewer surprises — advisory may be exactly what you need.

It’s not about adding complexity. It’s about replacing uncertainty with direction.
And if you’re ready to explore how proactive planning can improve your financial outcomes, the next step is simple:

If you think advisory might be right for you, reach out to De Boer, Baumann & Company. Let’s talk about your goals and build a plan for where you want to go next. We’ll help you sort through the priorities, put a clear path in place, and stay ahead of the big decisions as the year unfolds.

There’s nothing quite like opening the mailbox, seeing an envelope with “Internal Revenue Service” printed on it, and feeling your stomach drop. Even people who are perfectly organized — even people who’ve done everything right — feel the same jolt of panic when they receive an IRS notice.

But here’s the truth:
Most IRS notices are not emergencies.
Many are routine.
And almost all can be resolved calmly and cleanly once you know what you’re dealing with.

So, before you lose sleep, take a breath. Then take the next right steps.

Why the IRS Sends Notices in the First Place

The IRS sends millions of notices every year, and most fall into just a few categories:

• Something didn’t match
  This is the most common scenario. The IRS receives a form (like a 1099 or W-2) that doesn’t match what was on your return. This triggers an automatic letter — not an accusation.
• They need more information
  Sometimes a number wasn’t clear. A form didn’t show up. A math error correction triggered a follow-up. It’s often small.
• A payment was short, delayed, or misapplied
  Your payment might have gone to the wrong tax year, posted late, or not matched the number on your return.
• They’re adjusting something on their end
  This could be a refund recalculation or an update to a credit or deduction.
• They’re confirming identity
  Identity theft protections are much stronger now, and sometimes the IRS asks you to verify you’re… you.
  In most cases, the notice is informational — not a threat.

The Most Important Thing: Don’t Respond Alone

The biggest mistake people make is replying to the IRS too fast or without guidance.

You may be tempted to:

• Pay whatever number the letter shows
• Call the IRS immediately
• Send documents without context
• Ignore it and hope it goes away

Those reactions almost always make things harder.

The IRS letter is talking to you — but you should talk to your financial professional first.

They’ll help you understand:

• Whether the notice is accurate
• Whether you actually owe anything
• Whether the IRS made an error
• Whether this is a simple fix or needs representation
• What documentation (if any) needs to be provided
• Whether you should respond at all

You are not meant to navigate this alone.

What Your Notice Actually Means

Every notice has a code (such as CP2000, CP14, or CP75). Those codes help identify the issue quickly.

Here’s a quick guide to the most common ones:

CP2000 — Underreported Income

This is the big one. It means the IRS thinks your income was higher than what you filed. This does not mean you did something wrong. Often, a vendor filed a form late or incorrectly.

CP14 — Balance Due

This shows a balance the IRS thinks you owe. It could be accurate… or it could be the result of a timing issue.

CP75 — Audit Documentation Request

The IRS wants proof related to a credit or deduction. Again, not a panic situation — just a request.

Letter 5071C — Identity Verification

This is part of fraud prevention. It’s not about your return being “wrong.”

Notice of Intent to Levy (LT11/CP504)

This is more serious and requires prompt action — but still not panic. Professionals resolve these daily.

Whatever the code, context matters more. And that’s where guidance helps.

What NOT To Do When You Receive an IRS Notice

A calm, correct response almost always leads to a clean resolution. But these common mistakes make things significantly worse:

Don’t ignore the notice. Deadlines matter.

Don’t call the IRS before reviewing the notice with a professional. You may accidentally agree to something you shouldn’t.

Don’t pay the amount automatically. The number may be wrong — sometimes by a lot.

Don’t send documents without explanation. The IRS reads what you send literally. Context is everything.

Don’t assume this means you’re being audited. Most notices have nothing to do with audits.

 How the Process Usually Goes

Here’s what a calm, correct resolution typically looks like:

1. You contact your financial professional and share the notice.
2. They review your return and the IRS data to see what triggered the letter.
3. They determine whether the IRS is correct or incorrect.
4. They prepare the appropriate response — or advise that no response is needed.
5. If money is owed, they ensure the amount is accurate and the payment is sent to the correct tax year.
6. If the IRS is mistaken, they prepare a clear explanation and supporting documents.

Most cases resolve with a single letter. Some take a few rounds. But almost all are manageable. 

Why Having Professional Support Makes a Huge Difference

IRS notices feel intimidating, but a professional sees these all the time. They know:

• How to interpret the codes
• How to match the notice to your return
• Where IRS errors commonly happen
• How to fix misapplied payments
• How to communicate with the IRS clearly and effectively
• When to escalate an issue
• When notto respond at all

And most importantly… they know how to keep you calm and protected through the process.

 If You Got a Notice, You Don’t Have to Solve It Alone

If you have received an IRS notice, whether it is confusing, unsettling, or simply unexpected, contact De Boer, Baumann & Company. We will review it with you, explain what it means, and help you respond the right way.

No panic.
No guesswork.

Just clarity, support, and a clean path forward.