How to Leverage Clawbacks for Tax Relief After a Ponzi Scheme
United States tax attorney, Richard S. Lehman has created many educational videos to help educate the public on United States taxation. This fifty-minute educational video is about getting tax refunds when someone has made money in a Ponzi scheme and later the scheme collapses. When this happens, a bankruptcy trustee is appointed to collect money from those who profited from the scheme. The trustee can collect both the profits people made and the initial money they invested.
This presentation explains that there are two ways to handle these repayments, called clawbacks. The first way is to deduct the repayment amount from your taxes in the year you pay it, which can result in tax refunds. The second way is to use a special section of the tax code that allows you to go back to the years when you made the profits and claim tax refunds based on the higher tax rates of those years.
In the past, you could amend previous years’ tax returns to claim deductions for losses, but under the new Trump tax bill, you can only carry losses forward to future years. So, it’s important to take advantage of the special code section to maximize your refunds.
The video also distinguishes between clawbacks of profits and clawbacks of the initial invested money. Clawbacks of profits can be used to claim tax refunds from previous years, while clawbacks of the initial investment can only be deducted in the year of repayment.
To qualify for tax refunds through the special code section, you need to show that the income from the Ponzi scheme should not have been included as taxable income in the first place. It’s crucial to have a well-documented settlement agreement and a detailed letter from the trustee explaining the nature of the clawback.
The presentation concludes by emphasizing that the mitigation section allows you to go back to previous years and claim deductions and refunds, but going forward, under the new Trump tax bill, you can only carry losses forward. It’s a complex topic, but taking advantage of the mitigation section can help maximize your tax refunds in these situations.
Value can be lost without good professional advice.
