Madoff victims may recover more cash via new tax rules than from clawbacks

Bernard Madoff's victims may recover more of their lost funds by filing tax claims than they could hope to get from trustee Irving Picard's recovery efforts. So far, he's recovered only about $1.5 billion in assets to be split among customers with estimated losses of $19.4 billion. Picard has also filed lawsuits to recover another $15 billion from some of the Madoff firm's institutional clients and individuals, but how much of that will be clawed back -- if any -- remains to be see.

While some investors have received insurance payouts of $500,000 each from the Securities Investor Protection Corporation, certain victims are finding that the fastest way to recover some of their losses is by filing for tax refunds. As victims of a Ponzi scheme, they can generally deduct nearly all their qualified loses, including any "phantom income" (income reported, but never taken out of the account) in the year the fraud was discovered. This speeds up the process because victims normally would have to wait for years to deduct their losses.