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Ponzi Scheme

What is a Ponzi scheme?

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity.

Is a Ponzi scheme when a company tries to raise money for a business plan but doesn’t use the money to pay back older investors?

If the company is raising money for a legitimate purpose, then it is not a Ponzi scheme. A Ponzi scheme is a scam that brings in money for no legitimate business purpose and is basically theft. The new money pays the older investors, and the rest goes to the schemer for profit.

If someone was the victim of a Ponzi scheme and bought the assets (limited partnerships ) in both regular money and in IRA and the IRS has already addressed taking theft losses from their regular money can they take advantage of the theft loss under a specific code on their taxes.

There is no offset for the loss in your IRA. Unless there were after tax contributions in the IRA, your basis in the IRA is $-0-. You had not recognized the income from the IRA so there is no loss available. If your IRA still had the funds your withdrawal would be taxable income. Your "benefit" from the loss is that you will not have to include those dollars as income in the future. There are some private letter rulings that would allow you to rollover the IRA portion of the settlement.

If someone was defrauded in the Madoff Ponzi scheme and chose the safe harbor treatment to deduct 95% of their loss on their 2009 tax return, can they deduct the remaining 5% balance of the loss in 2010 or later? If so, what is the procedure and form?

If you use the safe harbor method then you are not permitted to deduct any remaining loss. From Revenue Procedure 2009-20 in Section 6.02:

"By executing the statement provided in Appendix A of this revenue procedure, the taxpayer agrees-Not to deduct in the discovery year any amount of the theft loss in excess of the deduction permitted by section 5 of this revenue procedure;"

So, it would only be possible to deduct the remaining amount if you do not use the safe harbor method. Of course, that would then remove the protection provided by the safe harbor whereby the problems of proof in determining how much income reported in prior years was fictitious or a return of capital are avoided and compliance and administrative burdens are reduced.

If someone has invested in what is now called a Ponzi scheme how does that affect their future tax liability or their last couple of years taxes if they paid tax on interest received and that now appears to be their own money that they received and paid tax on. Is there a publication they can request?

A loss must be recorded in the year of the loss, and you can amend your tax returns to adjust for having claimed too much income (1040X amended income tax returns), but the IRS will only go back three years for you in general in order to get refunds. Losses like this will be deemed as capital losses in the year of the loss, and reported on Schedule D of your tax return.

If you fall victim to a Ponzi scheme you may be robbed of your lifetime savings. Ponzi schemes can ruin a person’s life, cause havoc with the IRS and generally be a nightmare. If you have questions regarding Ponzi schemes it would be a good option to ask an Expert to assess the particulars of your case and provide legal insights.
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