Madoff victims may get millions in tax refunds

Taking advantage of a special IRS rule for Ponzi-scheme losses, some Madoff victims are starting to get some of their money back in the form of IRS refunds, according to a report in today's Wall Street Journal. So far the biggest refund is about $500,000 dollars, but some people have filed returns for multi-million dollar refunds.

In March the IRS ruled that investors could take a theft loss on their amended 2008 returns. Since many Madoff investors let their money grow with Madoff for 20 years or more and paid taxes on the dividends and capital gains they supposedly earned, even though they didn't take the money out, they are sitting on multi-million dollar loses.

The IRS is paying out less to those who are suing third parties, on the assumption that they have a better prospect of recovering losses.

Some tax accountants advised their clients to wait on filing because they didn't know how the IRS would handle the refunds. So their clients will need to file for refunds on their 2009 returns. I'll bet the people that were advised to hold off wish they had filed those amended claims. Who knows how generous the IRS will be next year?

Those that did file amended 2008 tax returns will soon have cash in their pocket. Sometimes not playing games does pay off with the IRS.

Lita Epstein has written 25 books including The Complete Idiot's Guide to Tax Breaks and Deductions.

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