31 Oct If you get scammed, there’s tax help

Q. My brother got caught up in a Nigerian scam two years ago – “We need to get the money out of Africa and you can help us… just pay the taxes and fees.” He never told anyone but he gave the scammers more than $500,000 from his IRA, Social Security checks and bank accounts. He has nothing left, but he still thinks he is getting $20 million from Nigeria. My concern is with the taxes he will owe. What recourse does my brother have?
— Still working

A. There’s some help available for your brother.

First, you’re correct that your brother will need to report the IRA distribution income.

That will probably be fully taxable, and his Social Security benefits will probably be 85 percent taxable for the year received – presumably 2016, as you indicated the scam occurred two years ago, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Eatontown.

Take note that a provision of The Tax Cuts and Jobs Act eliminates the casualty loss deduction for any personal casualty unless it’s attributable to a federally declared disaster for 2018 through 2025. You’re saying your brother’s loss was older – before the law was changed – so he has some options.

Any savings accounts that were exhausted would not give rise to taxable income aside from any investment income generated on those accounts, he said.

“Your brother incurred a casualty loss because of the embezzlement he experienced,” Becourtney said. “The casualty loss is deductible to the extent it exceeds 10 percent of Adjusted Gross Income (AGI) plus a $100 floor.”

A casualty loss is reported on IRS Form 4684 and further guidance can be obtained from IRS Publication 547,  he said.

A casualty loss is reportable in the year it was discovered.

“Whereas your brother has yet to face the fact that he was embezzled, one could argue that the casualty loss occurred simultaneously as he remitted funds to Nigeria,” he said. “Your submission suggests that your brother has yet to report the income that funded his transfers to Nigeria.”

The sooner that he files his 2016 federal income tax return – or amends the return if necessary – the better.

If your brother resides in New Jersey, the tax outcome will be less favorable compared with the federal outcome.

While Social Security benefits are expressly nontaxable by the state, and a portion of the IRA distribution income may escape New Jersey tax to the extent of IRA contributions made in prior years that were never deductible for state purposes, there is no casualty loss deduction permitted in computing New Jersey taxable income, Becourtney said.

“Next month the New Jersey Division of Taxation will be launching a tax amnesty program,” he said. “Upon paying the tax owed for 2016, half of the interest owed and all penalties will be waived.”

Becourtney said the amnesty program will run until Jan. 15, 2019, so your brother should take advantage of the program.

Also remember that if the loss had occurred in 2018, then no deduction would be allowed. So be sure your brother can prove the timing of the scam.

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