The IRS May Tax Money Stolen From You - Here's the Bill Aiming To Change That

Imagine this: You've worked hard to save money in retirement, but you withdraw money from your 401(k) and lose it to a scam. Then, months later, you get an IRS tax bill on the money that you no longer have. It's a gut-punch scenario that Americans may encounter, and having to pay taxes on money that you've lost may be devastating and a real financial challenge.

The issue is the result of a policy change, but a proposed fix that might help fraud victims is now on the table.

How the tax quirk works and penalizes fraud victims

Under current law, money that individuals lose to scams, like impersonator or romance scams, is not tax-deductible. In contrast, an individual may be able to deduct losses from investment fraud.

The issue is even worse if a fraud victim withdrew money from a tax-deferred retirement account, like a traditional 401(k) or IRA. In such a situation, the victim might owe income taxes on their withdrawal, regardless of whether the money was lost to fraud. If the individual is younger than age 59 ½, they may even face an additional 10% early withdrawal penalty, further increasing the amount of money that they've lost.

How we got to the point where fraud victims have to pay taxes

Several factors have contributed to this tax quirk. Before 2018, individuals were often able to claim deductions for theft losses. In 2018, a temporary change implemented by the Tax Cuts and Jobs Act of 2017 limited tax deductions of such losses, allowing taxpayers to only deduct losses resulting from a federally declared disaster.

Last year, Donald Trump's "Big Beautiful Bill" made the change implemented by the Tax Cuts and Jobs Act permanent. Under the current tax code, taxpayers may be able to deduct losses due to investment scams, since the investor was working on a profit motive. Losses from romance, impersonator, and similar personal scams receive no tax relief, however.

The proposed fix to restore the theft-loss deduction

A bipartisan bill is designed to change the tax options available to victims of fraud. The Tax Relief for Fraud Victims Act H.R. 9500 would remove the current restrictions on the deduction of fraud-related losses. It would also waive the 10% early withdrawal penalty if it applies to a fraud victim.

By eliminating the current disaster-related limitation for deducting a loss, the bill would allow fraud victims to deduct the money that was stolen from them, which would help reduce their tax liability. It would also give victims the option to deduct their theft loss in the year when the losses were incurred, rather than having to deduct it from the year when the fraud was discovered, as is currently required by law.

Finally, the bill would make it easier for victims to replace the funds that they had withdrawn from a retirement account. Doing so could be difficult because of annuity contribution limits and restrictions, but the bill would give victims more flexibility in rebuilding their retirement accounts. Under the bill, victims who choose to claim the loss in the year of discovery would also have a one-year window to file an amended return after the fraud is identified.

The gravity of fraud loss

According to Federal Trade Commission (FTC) data, consumers, including older adults, have lost billions of dollars to fraud in 2025 alone. The FTC reports that people reported losing $3.5 billion to imposter scams in 2025, and the number of reported losses nearly tripled since 2020.

Of the types of reported fraud, imposter scams were the most common, making up nearly one in three fraud reports. Such imposter scams used text, phone, email, social media, and search engine results to target consumers. In some cases, consumers received a fake security alert that appeared to be from a bank urging them to move their money to protect it.

Keep in mind that these figures only reflect the fraud that was reported; it's likely that many more fraud cases exist and simply weren't reported to the FTC.

Why older adults are at risk of fraud

Fraud is also increasingly affecting older adults. According to data from the FTC's annual report to Congress released in December 2025, fraud losses reported by adults ages 60 and older skyrocketed from about $600 million in 2020 to $2.4 billion in 2024. Losses over $100,000, which were often related to investment scams, romance scams, and impersonations, were the primary driver of the increase.

The report also revealed that older adults were much more likely to report losing money on tech support scams, prize, sweepstakes, and lottery scams, romance scams, and government impersonation scams than younger adults. Since older adults reported greater fraud losses, the Tax Relief for Fraud Victims Act may have a particularly important impact on retirees who may have experienced fraud losses.

Bottom line

At this time, the Tax Relief for Fraud Victims Act is proposed legislation, not enacted law, so it doesn't change anyone's current tax situation after experiencing a fraud loss. If you or a loved one has experienced a loss to fraud, take the time to thoroughly document the loss, including when and how it occurred. Be sure to also consult a tax professional before assuming that you're able to deduct any portion of that loss. If your personal information was compromised, freeze your credit with all three credit bureaus to prevent anyone from being able to apply for credit in your name.

Fraud may be financially devastating. Staying informed about common scams and watching out for red flags may help protect you from making expensive financial mistakes and falling victim to a scam.

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