Greg's Corner

The Tax on Being Scammed

By Greg Collier

Most people assume that if money is stolen by scammers, the victim simply loses the money.

Unfortunately, the financial damage often doesn’t stop there.

In some cases, scam victims can also end up owing taxes on the very money that was stolen from them.

That sounds impossible, but it is a real problem that has become significant enough that Congress is now considering legislation to provide relief for fraud victims.

For the average person, this is one of the most confusing and frustrating parts of modern scam losses, so let’s break it down in plain English.

How Someone Can Owe Taxes on Stolen Money

Here’s a simple example.

A retiree receives a call from someone pretending to be from the FBI, Apple, a bank, or another trusted organization. The scammer convinces the victim that their accounts are in danger and tells them to withdraw money from a retirement account, such as a 401(k) or traditional IRA, to “protect” it.

The victim withdraws $100,000 and sends it to the scammer.

The money is gone.

But the IRS may still view that $100,000 withdrawal as taxable income.

Why?

Because money coming out of a traditional 401(k) or IRA is generally taxed when it is withdrawn, regardless of what happens to it afterward.

So the victim could lose $100,000 to a scammer and owe income taxes on that $100,000 distribution.

If the victim is under age 59½, they may also face a 10% early withdrawal penalty.

That means a scam can create a second financial disaster months later when tax season arrives.

Why This Happens

Before 2018, many theft losses could potentially be deducted on a tax return.

Then the Tax Cuts and Jobs Act of 2017 changed the rules.

Since 2018, personal theft losses are generally deductible only if they are connected to a federally declared disaster. A recent law made that limitation permanent.

That means many common scam losses, including:

• Government impersonation scams
• Romance scams
• Tech support scams
• Apple or bank impersonation scams
• Courier scams
• Gold bar scams

are generally not deductible under current law, according to tax experts cited in the report.

The Part That Confuses People Most

A victim might ask:

“If I never got to keep the money, why am I being taxed on it?”

The answer is that the tax system often treats the withdrawal and the theft as two separate events.

• The withdrawal from a retirement account is taxable.
• The later theft may not qualify for a deduction.

That distinction can feel incredibly unfair to victims, especially retirees who were manipulated into withdrawing their life savings.

Congress Is Trying to Change This

A bipartisan bill called the Tax Relief for Fraud Victims Act has been introduced in Congress.

The bill was approved by the House Ways and Means Committee on July 1, 2026, which means it has advanced in the legislative process, though it has not yet become law.

If enacted, the bill would:

• Restore the ability for many fraud victims to deduct theft losses.
• Eliminate the current disaster-related restriction.
• Waive the 10% early withdrawal penalty in qualifying scam cases.
• Make it easier for victims to replace money withdrawn from retirement accounts.

In other words, it is designed to prevent victims from being punished twice: once by the scammer and again by the tax system.

Scam Losses Are Exploding

The timing of this bill is not accidental.

According to the Federal Trade Commission, consumers reported $15.9 billion in fraud losses in 2025, the highest amount ever recorded.

Reported losses have increased nearly 430% since 2020.

One of the fastest-growing categories involves losses of $100,000 or more, particularly among adults age 60 and older.

That matters because older adults are more likely to have substantial retirement savings that scammers can target.

The Scams Most Likely to Trigger This Problem

The biggest risk occurs when victims are persuaded to withdraw retirement funds.

Common examples include:

• Fake FBI investigations
• Apple fraud alerts
• Bank fraud department impersonation
• Gold bar scams
• Cryptocurrency “safe account” scams
• Tech support scams claiming your accounts are compromised

The script is often similar:

“Your money is in danger. Withdraw it immediately and move it to a secure location.”

That “secure location” is usually the scammer’s pocket.

Red Flags

Be extremely suspicious if anyone tells you to:

• Withdraw money from a 401(k) or IRA.
• Buy gold or precious metals.
• Purchase cryptocurrency.
• Move money to a “safe account.”
• Keep the transaction secret from family members.
• Act immediately to avoid arrest, fraud, or account freezes.

No legitimate bank, government agency, or financial institution will instruct you to protect your money by sending it to someone else.

What To Do If You’ve Already Been Scammed

If you have already lost money, especially from a retirement account:

Contact your financial institution immediately
There may be a small window to stop or trace transactions.

File reports
Report the fraud to:

• Local law enforcement
• The FBI’s Internet Crime Complaint Center (IC3)
• The FTC at ReportFraud.ftc.gov

Talk to a tax professional
This is the step many victims miss.

A CPA, enrolled agent, or tax attorney can determine:

• Whether any deduction may be available.
• How retirement distributions should be reported.
• Whether penalties might apply.
• Whether future law changes could affect your situation.

Keep all documentation
Save:

• Bank records
• Wire confirmations
• Emails and text messages
• Police reports
• FBI or FTC complaint numbers
• Any correspondence related to the scam

The Emotional Toll Is Real

Victims often focus on the lost money, but the tax consequences can add another layer of stress.

Imagine discovering:

• Your retirement savings are gone.
• You may owe thousands in taxes.
• You may face penalties.
• Recovery of the stolen money is unlikely.

That is why many advocates argue the current system is too punitive for fraud victims.

Final Thoughts

The most important thing for readers to understand is this:

Being scammed does not automatically erase the tax consequences of the financial transactions the scammer convinced you to make.

If a scammer persuades you to withdraw money from a retirement account, the IRS may still treat that withdrawal as taxable income even if the money was immediately stolen.

Congress is considering changes that could provide meaningful relief, but as of now, victims should not assume that a scam loss will automatically reduce their tax bill.

The best defense remains prevention.

And if you or someone you know has been scammed, don’t just call the bank.

Call a tax professional too.

Because sometimes the scam doesn’t end when the money disappears.