Bill Aims to Ease Tax Burden for Fraud Victims

For victims of fraud, a second financial blow sometimes comes their way — they owe taxes on the stolen money.

Scam victims have faced restrictions on whether they can claim their losses as a deduction on their tax return since 2018, due to a temporary change under the Tax Cuts and Jobs Act of 2017. President Donald Trump's "big beautiful bill" law enacted last year made that change permanent.

While investment fraud losses may be deductible, according to an IRS memorandum issued in March 2025, money lost to other scams — such as impersonator or romance scams — is not, experts said.

In addition, if the victim tapped a tax-deferred retirement account such as a traditional 401(k) or individual retirement account as part of the fraud, income taxes may be due on the distribution. And if the victim is younger than age 59½, an early withdrawal penalty of 10% may be imposed.

A bipartisan congressional bill aims to change the tax treatment of those losses. Called the Tax Relief for Fraud Victims Act, H.R. 9500 would eliminate the deductibility restrictions and waive the 10% penalty if it applies, among other provisions.

"It's very punitive not being able to claim a theft loss deduction," said Matthew Roberts, a tax attorney and partner at Meadows Collier in Dallas.

The bill was approved by the House Ways and Means Committee on July 1 with a vote of 39-0. It's uncertain when or whether the full House will consider the measure.

Reported fraud is up nearly 430% since 2020

The amount of money lost to scams continues to grow, according to the Federal Trade Commission. In 2025, consumers reported $15.9 billion in fraud losses to the FTC — the highest on record and an increase of about 27% from $12.5 billion in 2024. Since 2020, reported losses have increased nearly 430%, according to the FTC.

Last year, imposter scams ranked as the most reported type of fraud, according to the FTC's latest data. While 80% of the roughly 1 million who filed an imposter scam report didn't lose money, the other 20% lost a collective $3.5 billion, the FTC's data shows. Investment scams resulted in the largest reported losses, at more than $7.9 billion.

The overall growth in fraud losses is driven by a jump in the share of consumers who say they were scammed out of $100,000 or more — a trend most prevalent among adults age 60 and older, according to the FTC.

"That's generally because retirement accounts are being cashed out," said Clark Flynt-Barr, AARP's government affairs director for financial security.

In that age group, losses of six figures or more amounted to $1.6 billion — 68% — of the $2.4 billion reported lost in 2024, according to the FTC's 2025 annual report to Congress, released in December.

How the law changed

Prior to 2018, taxpayers generally could claim itemized deductions for unreimbursed personal casualty losses — such as from a weather event — and theft losses, subject to certain parameters such as only being able to deduct the loss amount exceeding 10% of the taxpayer's income.

However, the TCJA changed the rules by limiting the deductibility of such losses to those resulting from a federally declared disaster. The provision, originally scheduled to apply only to tax years 2018 through 2025, was made permanent last year under the "big beautiful bill," which also expanded eligibility to include state-declared disasters.

Separately, amounts lost to investment scams can be deductible because there was a profit motive on the part of the investor, which is treated differently under the theft-loss part of the tax code, experts said.

"That's another really frustrating part of this whole scenario," Flynt-Barr said. "Victims have to be victims of the right type of scam."

Bill would restore deduction, add other protections

The new bill would eliminate the disaster-related limitation for both personal casualty and theft losses.

"It reinstates the deduction to provide relief to victims of fraud so they can deduct the amount stolen from them, thereby mitigating the majority of the tax consequences," Flynt-Barr said.

The bill also would give victims more flexibility by allowing taxpayers to deduct their theft losses for the tax year in which the losses were incurred as opposed to the year the fraud was discovered. Under current law, if fraud is found to have happened with money that was taxed in a previous year, victims that qualify for a deduction generally must apply it to their income for the year the fraud was discovered, Roberts said.

"Many taxpayers who are retired may not have taxable income in future years after the theft occurs, particularly where they lost their retirement funds," Roberts said.

In addition to waiving the 10% early withdrawal penalty in situations where it would otherwise apply, the bill also would let victims more easily replace funds withdrawn from retirement accounts, which currently can be tricky due to contribution limits and other rules, experts said.