How do I treat (for tax deduction purposes) a $370,000 Roth IRA loss resulting from a ponzi –scheme "Madoff type" investment?

Asked over 1 year ago - Los Angeles, CA

I converted an approximate $400,000 IRA to a Roth IRA in 2001, which I invested in a (later to be determined) ponzi scheme in 2001. The entity was taken over in 2002 by the Feds and given a court appointed receiver for dissolution. My Roth IRA was closed in 2007 due to insufficient funds and I rec'd about $30k in returned Roth IRA funds in 2008 from the receiver.

From my limited search, it appears that I may only be able to deduct the Roth IRA losses on Schedule A as a Miscellaneous Itemized Deduction for 2007 (or 2008?...not sure) and not use it as an NOL. I had virtually zero income on both of those years, so this entire loss is of “lost” if I cannot spread it out over multiple years.

My tax returns have not been done since 2001 (so I need to do 2002 thru the present). Need help!

Attorney answers (4)

  1. Evan A Nielsen

    Contributor Level 18

    6

    Lawyers agree

    Answered . Depending on how the funds were contributed, there may be a way to claim the NOL going forward but it's going to be very detailed and you'll need the assistance of a good CPA or Tax Attorney that actually prepares taxes to get it done. And you'll need to get the back taxes caught up as well. Holler if you need assistance.

    Good luck.

    Evan A. Nielsen is licensed to practice law in California and handles federal tax matters throughout the U.S. The... more
  2. Bruce Givner

    Contributor Level 19

    5

    Lawyers agree

    Answered . The basic rules are in Revenue Ruling 2009-9. IRS Information Letter 2009-0154 explains that you will not get a loss unless you have basis in your IRA. Since you converted to a Roth IRA you should have basis, so you should be able to take a loss. We have a lot of experience with Ponzi scheme losses, not just Madoff, but ones in the Pakistani and Korean communities as well.

  3. Linda Simmons Campbell

    Pro

    Contributor Level 14

    4

    Lawyers agree

    Answered . I agree with Attorney Nielsen, you need assistance with this matter. You should give him a call.

    info@cttaxhelp.com Office number: (860) 255-7423 Website: www.cttaxhelp.com. Our reply to your question has not... more
  4. Robert V Cornish Jr.

    Contributor Level 16

    2

    Lawyers agree

    Answered . You also need to be aware of how to treat your Madoff distributions from the estate and whatever money you received that might be subject to a clawback. My firm has people that handle these sorts of matters, but whatever you do please sit down with a tax attorney to handle everything so that the best results are reached on the full picture - not just a snapshot.

    The foregoing is not legal advice nor is it in any manner whatsoever meant to create or impute an attorney/client... more

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