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Ask Charles Markham Your Own Question
Charles Markham
Charles Markham, EA, MST, USTCP
Category: Tax
Satisfied Customers: 769
Experience:  IRS Enrolled Agent, US Tax Court Practitioner
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I had an investment in what turned out to be a ponzi scheme.

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I had an investment in what turned out to be a ponzi scheme. Over the first two years, they paid interest, and I of course paid taxes on that income. Now that I know it was a ponzi scheme, that interest was really a partial return of principle. Can I file 1040X now, or do I need to wait for a restated K-1

TaxWhisperer :

You do not need to wait for a K-1 to file a Ponzi Scheme claim. However, in order to file a claim

TaxWhisperer :

You do not need to wait for a K-1 to file a Ponzi Scheme claim. However, in order to file a claim you must include certain info.

TaxWhisperer :

For example, the IRS wants some documentation that a Ponzi Scheme was operated.

TaxWhisperer :

This is normally some sort of state or federal document that shows charges were filed.

Customer:

Does this fbi press release do the job

TaxWhisperer :

Here is an IRS link, but I am happy to answer questions:

TaxWhisperer :

Just a second let me look at your link.

TaxWhisperer :

Yes, that should do it. However, if I were you, I would file the claim in 2013 on an original return.

TaxWhisperer :

I say this because I have a Ponzi Scheme 1040X in my office right now. They tend to audit these

TaxWhisperer :

and can be real sticklers about the documentation.

Customer:

So called interest payments were made in 2010, and 2011

TaxWhisperer :

I understand.

TaxWhisperer :

If you file a 1040X to remove those payments then this DECREASES your lost that you can claim in 2013.

TaxWhisperer :

Because as you correctly note, these are actually returns of principal.

TaxWhisperer :

How much were the interest payments? Ballpark?

Customer:

half the presidents salery

TaxWhisperer :

Hmmm...okay.

TaxWhisperer :

Well, sure, you can file amendments for 2010 and 2011.

Customer:

Got Madoff'ed big time

TaxWhisperer :

What's strange is that I thought 2008 stock crash flushes all that out.

TaxWhisperer :

Guess not.

Customer:

Thanks, XXXXX XXXXX been preparing docs for my accountant, just stumbled into this site, thought what the heck, so much opinion info on tax stuff

TaxWhisperer :

Okay, there's no right answer here, just be prepared, this will trigger an audit.

Customer:

What do you mean about stock crash. This Invetment was made after that.

TaxWhisperer :

It was the 2008 sub prime stock crisis that exposed many of the Ponzi Schemes.

TaxWhisperer :

I guess I was naive in that I thought these guys were out of business.

TaxWhisperer :

I'm sorry to see that's not the case.

Customer:

And yes, I guess I need to make sure my own info is all intact for the audit. Turns out there were federal agencys that had investment there also, so I think the FBI is going to be very aggressive against these guys. You would think that that would give IRS comfort in its reality

Customer:

There are alway a line of crooks to replace the ones going to jail today

TaxWhisperer :

Have I answered yoru question(s)? Do you have more?

Customer:

Yes, and thanks

TaxWhisperer :

Okay, the way the site works is that you must leave feedback.

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