U.S. Senator Kit Bond today announced bipartisan efforts in Congress to provide relief to victims of Ponzi schemes like those run by Bernie Madoff and Alan Stanford. Bond is co-sponsoring the Ponzi Scheme Victims' Tax Bill of Rights (S. 3166), a bipartisan bill, led by Senators Jon Kyl (R-AZ) and Charles Schumer (D-NY), that will ensure tax relief is not just provided to big investors who lost money, but the thousands of everyday Americans who lost their life savings to these hoaxes.
"It is essential that our laws help not just big investors, but the thousands of everyday Americans in Missouri and across the nation who lost it all," said Bond. "Many of these victims lost their life savings to Ponzi schemes and this bipartisan bill will provide them the tax relief they need and deserve."
Bond took action after being contacted by a St. Louis area couple who lost their retirement savings as part of a nationwide Ponzi scheme run by the Stanford Financial Group. The couple, a Vietnam Air Force Veteran and a former special education teacher, are both retired and have been struggling to make ends meet for more than 13 months without retirement savings. While one has been able to find a part-time job, the other battles cancer, making the loss of their savings all the more difficult to bear.
If signed into law, the legislation Bond is co-sponsoring will directly help the St. Louis area couple in recovering some of their lost retirement savings. Specifically, Bond's bill will extend tax breaks large, direct investors receive to smaller, indirect investors, like senior citizens living on retirement savings, who lost funds contributed through Individual Retirement Accounts (IRAs). Many of these smaller investors trusted their money to financial advisors, often having no idea their assets had been invested in a Ponzi scheme.
Developed with the help of Ponzi scheme victims' advocates from across the country, this legislation will: increase the amount smaller investors can carry back on their income taxes, meaning victims can receive refunds for taxes paid in years before the losses were discovered; allow victims who lost money within an IRA to recover losses for the first time by declaring a theft loss; raise the limit on tax-free contributions to retirement accounts so investors can replenish these accounts more quickly; and waive penalties for withdrawing funds from retirement accounts to meet daily expenses.
A summary of the bill's key provisions is below.
· The bill will define a qualified fraudulent investment loss. This definition will be based on the definitions included in the March 2009 IRS guidance.
· The bill will allow both direct and indirect investors with qualified fraudulent investment losses to carry back eligible losses to up to 6 prior taxable years, essentially doubling the period that existed prior to March 2009. Thus, under the bill the same rules with respect to NOL carry backs of qualified fraudulent investment losses will apply to both direct and indirect investors.
· Many victims, particularly a number of the smaller investors, held Ponzi-related assets in an Individual Retirement Account (IRA), with the result that these retirement savings are totally gone. Under current law, no tax relief is available for losses resulting from the theft of assets held in an IRA. Thus, an individual that lost a $250,000 investment in a taxable account as a result of the Ponzi-scheme theft has received a deduction for the loss, but an individual that lost a $500,000investment in an IRA has received no relief. Fixing this inequity is the highest priority for many victims.
Because taxes have not been paid on the majority of retirement savings (i.e., most retirement accounts are funded with pre-tax money), the amount of the allowable tax loss must be adjusted. Under the bill, victims will be allowed to claim a loss deduction for the qualified fraudulent investment loss in an IRA in an amount equal to the GREATER of (1) 100 percent of their individual and employer contributions (provided the contributions are substantiated), or (2) 50 percent of the IRA theft loss. The maximum loss that may be claimed under this provision is $1.5 million. Under the bill, the IRA loss deduction maybe carried back to up to 6 taxable years and carried forward up to 20 years.
For IRAs that contain money rolled over from other retirement accounts, the amount of the rollover is not itself considered to be an "employee contribution." Instead, an individual must substantiate the portion of the rollover that is attributable to employee and employer contributions.
· For all provisions of the bill, the amount of any qualified fraudulent investment loss is reduced by any expected recovery, through the Securities Investor Protection Corporation, legal action, or other sources.
· For any eligible individual (including a spouse) who turned 65 by December 31 of the year that the theft was discovered, the bill increases the maximum NOL carry back period for qualified fraudulent investment losses (whether held directly or indirectly or through an IRA) to 7 years.
· The bill will allow a waiver of the 10 percent tax penalty for withdrawals from retirement plans for an individual who is under age 59½ and who suffered a loss related to the Ponzi scheme. Penalty-free withdrawals will be permitted for up to 10 years from the date of the discovery of the fraud, or until a taxpayer has withdrawn the amount of the loss, whichever comes first. An individual will still be required to pay the income taxes on the withdrawn funds; the bill will simply waive the 10 percent penalty on early withdrawals in these circumstances.
· Under current law, a surviving spouse may not be able to fully utilize the loss carry back if the deceased spouse was the breadwinner and all of the assets were in the deceased spouse's name. The surviving spouse cannot use the deceased spouse's income in a year prior to death to offset losses --losses can only offset the surviving spouse's income in those years. Thus, if the Ponzi scheme account was the only asset then there is no future income against which the surviving spouse can apply the loss carry forward.
Under the bill, when there has been a change of marital status due to death, the surviving spouse will be able to carry back a qualified fraudulent investment loss to a prior joint return year (up to 7 years, in the case of someone who turned 65 by December 31st of the year that the theft was discovered) and offset the joint income, rather than just the income of the surviving spouse.
· To help restore an individual's IRA savings in the event of a qualified fraudulent investment loss, the bill will include a special "catch-up" contribution provision allowing an individual to contribute up to an additional 100 percent of the current contribution limits to any IRA account for a period of up to 10 years. This special "catch-up" contribution will be available for any individual who owns an IRA that lost at least 50 percent of its value as a result of a qualified fraudulent investment loss. For an individual with multiple IRAs, the bill allows the catch-up contribution for each eligible IRA.
· Many victims filed estate or gift tax returns reporting investments in Ponzi-scheme assets. Thus, the value of the assets reflected on these returns was overstated. The bill will allow a period of time to file amended estate and gift tax returns to obtain a refund of transfer taxes paid or to adjust the lifetime gift tax or generation skipping transfer tax exemptions to reflect the lower value of the assets transferred. The effect of the bill will be to permit certain estate or gift taxes paid on Ponzi-scheme assets, or lifetime gift tax or generation skipping tax exemptions that have been utilized with respect to Ponzi-scheme assets, to be appropriately refunded or restored.
The bill will allow an individual to amend returns, as necessary, for reportable gifts made in the year the theft is discovered, and the 6 taxable years prior to the theft discovery. An individual would have up to four taxable years after the discovery of the fraud to amend his gift tax returns. Thus, for example, a victim of the Madoff Ponzi scheme will have until December 31, 2012 to file amended gift tax returns for gifts made in tax years beginning January 1, 2002, and subsequent years through the date of discovery of the theft.
For estate taxes, the bill will allow estate tax returns for decedents dying after December 31, 2007 to be amended to account for Ponzi scheme assets. For decedents dying before January 1, 2008, consistent with present law, beneficiaries who inherited assets that became worthless after inheritance as a result of a Ponzi scheme will be able to utilize the NOL treatment and other benefits afforded to all victims.
· All provisions in the bill will only apply to qualified fraudulent investment losses discovered in calendar years 2008 or 2009.