Senate report shows scam victims are being taxed on stolen funds

Investigators from the Senate Special Committee on Aging are releasing a report Thursday detailing the cases of a dozen elderly and other scam victims facing large tax bills on the money that was stolen from them.

The report includes interviews with victims and tax experts who described the cascading misfortune faced by retirees from Pennsylvania, Ohio, Florida, Utah and California. They said getting hit twice — first by sophisticated thieves, then by the federal government — has left them financially devastated and with a deep sense of betrayal.

The investigation has been overseen by committee chairman Bob Casey, D-Pa., who has made the issue a priority. The report cites the case of Larry, a Pennsylvania retiree in his 70s who received a popup on his computer screen while trying to get into his retirement account. A scammer impersonating a Social Security Administration official tricked him into withdrawing his retirement funds and buying cryptocurrency. He had $765,000 stolen and owed the IRS more than $220,000, “which he did not have,” according to the report.

The taxes came due in his case because the IRS taxes distributions from pretax retirement accounts, even though Larry never got to spend the money because it was in the hands of the scammers. He eventually had to tap what was left of his savings and borrow from his brother to cover the tax bill.

“After over 50 years in the workforce, my retirement dreams, and any legacy to pass on to my children, have been stolen,” he told committee investigators. He also appealed to Congress to pass legislation providing relief.

The investigation further illuminates a problem chronicled in December by The Washington Post, which reported on the case of Frances Sharples, a former White House scientist from Silver Spring, Md., who was scammed out of $655,000 dollars then paid more than $100,000 in taxes. The Post found a pattern of retirees, among them a Republican former church secretary from Florida, facing heavy tax burdens on stolen funds.

In 2017, Republican lawmakers voted to scale back or eliminate many itemized deductions that targeted specific groups of taxpayers. That included temporarily repealing deductions for losses from storms, fires, earthquakes — and theft. Known as personal casualty loss deductions, they were suspended through 2025, with a few exceptions. Taxpayers with losses from presidentially declared disasters or in transactions entered into for profit still qualify for deductions.

The change, the GOP-controlled House Ways and Means Committee said in a report at the time, “makes the system simpler and fairer for all families and individuals” and would help streamline the tax code and grow the economy.

“Tax provisions like this were removed to offset the cost of lowering tax rates for everyone,” a House aide told The Post last year.

That same year, more than 100 House Republicans co-sponsored legislation to make the change permanent.

“I hope the devastation unveiled in this report helps ensure that we never make these mistakes again, and instead use the tax code to uplift working families and those in need,” Casey said.

Last month, Sen. Tammy Baldwin, D-Wis., introduced legislation to restore the personal casualty and theft loss deduction that was in place before the Trump-era tax cuts dramatically scaled them back.

The bill would also allow taxpayers hurt by the change, which began in 2018, to retroactively be entitled to relief.

“To me, it’s simple: victims of fraud — who often have had their life savings stolen — should not be stuck with a tax bill and have salt rubbed in their wound,” Baldwin said in a statement.

Her bill was co-sponsored by Casey and Sen. Peter Welch, D-Vt., and follows the introduction of a House bill in January.

Democratic staff on the Special Committee on Aging spent months questioning tax experts across the country about the plight of their clients and scrutinizing shortcomings in IRS procedures meant to help taxpayers, including some the report called “complex, burdensome, and harsh.”