What to Do if You've Been Hit By the Madoff Scandal

All is not lost. You may be able to get some of your money back

By Laura Cohn, Associate Editor, Kiplinger's Personal Finance

December 2008

If you’re among the investors hit by Bernard Madoff’s alleged Ponzi scheme, it’s too early to know whether you’ll get your money back. After all, the investigation is just beginning.

But there are some steps you should take now. First, get your statements and records in order. Then, get in touch with the Securities Investor Protection Corp., which recovers funds for investors. Individuals can file claims with the organization; for those who’ve lost money because of theft, the SIPC can return a maximum of $500,000.

You should be aware, however, that the Madoff case will be particularly challenging for the SIPC. According to the organization, because the precise size of the losses have yet to be determined it’s hard to know how much investors will get back. Another hurdle: The firm’s records are in a sorry state, which may prevent investors from recouping any losses. Making matters worse, the size of the alleged fraud—some $50 billion—is potentially the biggest on record.

But not all is lost. You may be able to save on your taxes. Check with your CPA. You might need to redo your tax returns from previous years. You also might be able to claim a tax benefit from the loss, known as a “theft loss,” on your 2008 return.

Of course, much depends on the outcome of the investigations into the alleged Ponzi scheme. You must claim a loss in the year it was discovered, so you have to do it now. If it turns out Madoff’s investors have suffered a total loss, your claim stands. But if there is some money left, and you get some of your investment back, you’ll need to amend your claim in a future tax year.

To take the theft-loss deduction, your loss must be greater than 10% of your adjusted gross income. Thomas Ochsenschlager, vice-president of taxation at the American Institute of Certified Public Accountants, says that first you add up your losses and subtract $100. Then you subtract 10% of your adjusted gross income for the year from that figure.

You can write off any excess loss as an itemized deduction on Schedule A. Use Form 4684 Form 4684 for your calculations. File the form with your taxes.

Unfortunately, not everyone can claim the deduction. Because many of the investors in Bernard L. Madoff Investment Securities LLC were tax-exempt organizations, a theft loss doesn’t apply to them. Such groups are not taxable to begin with, so they get no tax benefit.

• Print
• Comments
• Email
• RSS