Understanding Ponzi Scheme Clawbacks PLUS How To Maximize Your Tax Refunds
In this video, we’ll discuss a unique tax refund scenario related to Ponzi schemes. Imagine someone making money in a Ponzi scheme, and years later, when the scheme collapses, a trustee is appointed to recover funds from those who profited.
The trustee is often successful in collecting back the money, including the profits and even the initial investments. However, since the Ponzi scheme was based on false profits and the invested principle was non-existent, this recovery process is called a “clawback.”
Now, when faced with a clawback, you have two options for maximizing your tax refunds. First, you can deduct the amount paid as a clawback in the year you made the payment. This deduction can help you get a tax refund. Alternatively, there’s a special section in the tax code that allows you to go back to the closed year when you made the profits and reopen the statute of limitations.
By utilizing this unique code section, you can potentially get a larger tax refund by applying your profits from the closed year to offset your taxes. This can be more beneficial than a simple deduction. It’s worth noting that the new tax bill introduced by Trump restricts the ability to amend previous years’ returns, so it’s essential to take advantage of this opportunity while it’s still available.
The mitigation section in the tax code provides a way to go back and claim refunds based on the profits you made in the high tax bracket years. This can be beneficial for carrying back losses and getting refunds in those prior years. It’s important to remember that losses from Ponzi schemes or clawbacks cannot be carried back or deducted under the new tax bill.
To be eligible for the mitigation section, you need a well-drafted settlement agreement and a detailed letter from the trustee explaining the nature of the clawback. This documentation helps support your claim for refunds based on the taxes you paid on those profits in previous years.
Overall, understanding how clawbacks work and utilizing the mitigation section can help you maximize your tax refunds. It’s important to differentiate between clawbacks of profits and clawbacks of principle, as they have different tax treatments. Consult with a tax professional to navigate this process effectively.
