They were conned by skilled online criminals into draining their retirement savings. After the shock, shame and grief that followed, the victims were often left with something else: an enormous income tax bill.
Mary Ellen Strange, a 75-year-old widow who was deceived by fraudsters impersonating federal investigators, now owes the Internal Revenue Service an estimated $100,000 this year.
Linda Gilmore, an 80-year-old former nurse, has to pay nearly $50,000.
Cindy, 62, and Tina, 51, a married couple in California, owe roughly $250,000 to the federal and state governments.
Lori, a sales executive in North Carolina who owed $225,000 in the 2023 tax season, decided that filing for bankruptcy was her best option. (Several victims agreed to participate in this article if only their first names were used because of privacy concerns.)
Like thousands of others, they were drawn into cybercriminals’ fabricated worlds, which are built upon intricate plot lines and a mastery of manipulation. They had been led to believe that the scammers were government officials, Amazon fraud investigators or potential love interests, and they were tricked into transferring large sums for any number of concocted reasons.
The punishing tax bills arise because the victims pulled from individual retirement accounts or 401(k) plans, where money is taxed when it’s taken out. The withdrawals inflated their incomes, even though the funds disappeared shortly after being passed to the criminals. The victims are left with few options.
Ms. Strange lost nearly $378,000 — and that’s before taxes.
“It is a double punch,” she said. “It is a gut punch from your own government after you have been robbed blind.”
There used to be an easier way for people with the largest tax bills to deduct these losses from their income, using a tax deduction for victims of personal casualties, disasters and theft. But that and many other individual breaks were eliminated or narrowed as part of the Republican-led tax overhaul known as the Tax Cuts and Jobs Act of 2017, which helped to pay for broader tax cuts, including a reduced corporate tax rate.
The current structure of the deduction now treats victims unevenly. It can be used only with certain types of scams, even though all scams are built on a similar foundation of lies, often spun by organized criminals in faraway scam factories overseas.
The tax deduction, in its pared down form, says that personal casualty and theft losses can be claimed only in situations like federally declared disasters or “transactions entered into for profit.”
That means deductibility now depends on whether the victims had a goal of profiting when they entered into transactions with scammers.
Victims who lost money on a sham crypto trading platform operated by criminals working in Thailand, for example, have a more clear-cut path to tax relief than a person who lost the same amount to criminals posing as government officials claiming the money needs to be moved to be protected from a global hacking ring.
“This leads to profoundly disparate impacts: those that thought they were making a buck by investing with a cryptocurrency ‘guru’ are better positioned than those who fell victim to a romance scam,” Patrick Thomas, a tax lawyer, said in a letter included in a 2024 report from the Senate Special Committee on Aging.
Victims may also qualify for another type of relief, offered after the Bernie Madoff scandal, if their circumstances qualify as something related to a Ponzi scheme, which is also generally investment related.
But the relief options are less clear for the many others lured into different schemes.
“It’s a complete inequity in the current system,” said James Creech, a director at the tax advocacy and controversy practice at Baker Tilly, a large accounting and advisory firm in San Francisco.
He said there were three reasons people were usually pulled into these schemes: financial, fear and love. “But when you get to fear, that is where you get into the gray area” of the law.
He said he still tried to navigate the possibilities for his clients. Some victims who don’t fit neatly within the confines of the casualty loss deduction may still have defensible cases, he said, particularly those who thought they were safeguarding their income-producing retirement money from criminals so that it could continue to grow over time.
“But there’s a lot of work to get there,” Mr. Creech said. “This is one of those things where it really involves kind of a deep conversation with the client. My caveat with that is that it’s truly an unknown,” he added.
The I.R.S. hasn’t issued any broad guidance for online victims, but some tax lawyers have said they hear it is being developed.
To help support a case, tax experts say you need to document everything the moment you realize you’ve been a victim of a scam: File a police report with local officials (though they’re not always familiar with these crimes) and federal ones, including the Federal Bureau of Investigation’s Internet Crime Complaint Center.
If you decide to confront your scammers, first take screen shots of any online platforms or apps that you used to communicate with them, as well as online conversations, photos or anything related (such as a snapshot of a company name they used or a web address that you realize isn’t quite right). You should also create a timeline or narrative of the events.
“If you don’t have the evidence and the substantiation because it’s 18 months later and you’ve been paralyzed with fear, there isn’t much you can do,” Mr. Creech said.
Ms. Strange, the widow who lost nearly $378,000, received the initial call from her scammers last June while her dog was chasing the carpet cleaners in her home, “barking up a storm.”
That was the beginning of a seven-week ordeal of transferring money to multiple fake federal agents, using Bitcoin, gold bars and cash, all in an effort to prove her money was indeed hers and not obtained through money laundering.
“You think they are taking care of you,” she said, adding they made sure she had enough money to pay for her extensive dental work. “You think they have your interests at heart.”
Instead, they took off with her retirement savings, leaving her with $100,000 in an annuity.
Ms. Strange is now trying to navigate how to approach her 2024 tax return and liability of $100,000. She said she planned to pay her typical tax amount, and then weigh the options available given her circumstances.
One option she is considering is a settlement with the I.R.S. known as an offer in compromise. That allows taxpayers to pay the I.R.S. less than they owe because of an economic hardship, but settlements can be difficult to qualify for, especially for people with any home equity or other assets.
“With offers, generally the worse situation a taxpayer is in, the easier it is to get an offer accepted,” said Nancy Rossner, executive director of the Community Tax Law Project, which provides free advice to lower-income taxpayers with complicated tax situations.
Lori, whose romantic impostor left her with a $225,000 federal tax bill, decided to pursue a Chapter 13 bankruptcy, where she will pay her creditors, the I.R.S. chief among them, about $5,700 a month for five years.
That cleared away the $200,000 in loans she took out to help the impostor with his business, and it allowed her to keep her home and a car — a better outcome than the payment plan the I.R.S. had offered, which was only slightly less but would have left her saddled with the other debts.
“I have one choice — and it’s to get through it,” Lori said, adding that she was thankful for her AARP support group. “The real outrage is the protections that were in place through the federal government regarding income tax have been removed. It’s a disgrace.”
Ms. Gilmore, the 80-year-old retired nurse, is now living on Social Security benefits and two small annuities, and she has secured affordable housing for $2,100 a month.
She was defrauded by an online criminal posing as a priest she had known for 30 years. The scammer reached out to her on Facebook and ultimately made off with all of her liquid retirement savings. That generated a nearly $47,000 tax liability, which includes about $11,000 in state taxes owed to California. The way the states treat these situations can amplify a victims’ losses, tax experts said, generating huge tax liabilities of their own.
“I didn’t sleep for seven weeks,” said Ms. Gilmore, who started seeing a therapist and taking a small dose of an antidepressant. She said she was also carrying credit card debt from the scammer.
“I’m waiting for a reply from I.R.S. after I sent them papers they requested,” she said. “I reported everything, but I’m sure they can’t do anything about it.”
For now, the future of tax relief for victims of online scams is uncertain.
The casualty and theft loss deduction is set to spring back in its original form at the end of this year if the sweeping 2017 tax law expires. But Republicans are trying to extend that package.
There were efforts in Congress last year to bring attention to these giant tax bills, including the 92-page report from the Senate Special Committee on Aging, led at the time by Senator Bob Casey, a Democrat from Pennsylvania. Other lawmakers drafted legislation to offer more comprehensive and retroactive relief, dating back to 2018 when the deduction was curtailed. But they haven’t made it into law.
Even the original casualty loss deduction was limited. It could be claimed only by taxpayers who itemized deductions on their returns, which means the total amount of those deductions had to exceed the standard deduction for it to be worth it. And the deduction applied only to losses that exceeded 10 percent of their adjusted gross income.
“It’s really like a triple punch,” said Tina, who, with her spouse, Cindy, lost $1.2 million over six weeks to internet thieves. “We lost all of our retirement, we owe the I.R.S. a lot of money and then we have to go into further debt to hire legal representation.”
Ron Lieber contributed reporting.