Examples of situations where taxpayers may lose their tax deduction for a theft loss
Taxpayers may lose their tax deduction for a theft loss if they have a reasonable prospect of recovering all or a portion of the loss. In such cases, the theft loss deduction will be postponed until there is a recovery or there is a certainty that the loss will not be recovered.
For example, if a taxpayer discovers a theft loss in 2022 but has a reasonable prospect of recovering some or all of the loss, they cannot claim a deduction for the entire loss in 2022. Instead, they must postpone the deduction until there is a recovery or there is a certainty that the loss will not be recovered. This means that the taxpayer may lose their tax deduction for the portion of the loss that is recoverable.
Another example is if a taxpayer discovers a theft loss in 2022 but fails to take reasonable steps to recover the loss. In such cases, the IRS may argue that the taxpayer did not have a reasonable prospect of recovery and disallow the deduction. Therefore, taxpayers must take reasonable steps to recover their losses to avoid losing their tax deduction.
Read all about this topic; The Reasonable Prospect Of Recovery, by Richard S. Lehman, Esq.
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