Taking Aim at the IRS's Definition of Theft Lossesby
The IRS sets strict rules when it comes to deductions for theft losses. It defines theft as “the unlawful taking of money or property with the intent to deprive you of it.” Consequently, the agency is justifiably skeptical when the victim and the “thief” are acquainted or related and the facts fail to establish that there was a taking without consent.
There have been cases in which taxpayers can claim write-offs due to theft, but the new tax law has suspended that, which will be discussed later in this article.
Taxpayers whose deductions are denied frequently take their disputes to the Tax Court, which is entirely independent of the IRS. The Tax Court is the only forum where taxpayers are able to contest IRS assessments for additional taxes, interest and penalties without first paying the contested amounts. In other federal courts, taxpayers must first pay and then sue for refunds.
The IRS doesn’t always have the last word. An IRS courtroom defeat occurred in 1982, when the Tax Court ruled against the government in a decision involving Jim Wilson. While Jim was at work, his mother called the police to report that she had witnessed the removal of furniture and other belongings from his home by a woman with whom Jim had shared quarters for several years. Jim told the police that one of the missing items was a necklace worth $10,000. He never sued his girlfriend to recover the necklace, although he apparently knew the out-of-state address where she had moved following the theft.
The IRS contended that Jim’s failure to sue meant that he acquiesced in the taking of the necklace. Hence, his theft-loss deduction ought to be denied.
But the court noted that he took this course on the advice of his lawyer and others he trusted. Moreover, recovery costs would have exceeded the value of the property, given the departure of the woman to another state. The court found that “the mere fact that probably fruitless or economically ill-advised steps were not taken does not necessarily indicate any acquiescence in the actual taking.”
In 1990, the Tax Court also sided with George John Kreiner, a New Yorker who took a theft-loss deduction for $19,000 in cash and property that he had given to two Times Square fortunetellers, a mother and her daughter. What prompted Incurious George’s generosity? He believed the fortune tellers’ promise that they could relieve his depression and other mental problems.
The court cited a New York statute that makes fortunetelling a theft-related offense. The law defines fraud to include telling fortunes or promising to control occult forces, unless done at shows or exhibits solely to entertain or amuse.
While George voluntarily asked for advice, that doesn’t bar the write-off. According to the court, "a gullible person who gives money to fortunetellers in the belief that they will help is still defrauded or swindled. Theft is a broad term and includes theft by swindling, false pretenses, and any other form of guile."
Suspension of Write-offs
Just before Christmas, President Trump signed the Tax Cuts and Job Act, the most comprehensive overhaul of the Internal Revenue Code since the Tax Reform Act of 1986. The legislation includes a provision that suspends deductions for theft and casualty losses claimed on the 1040 form’s Schedule A.
Our compassionate lawmakers carved out an exception for such losses when they’re claimed by individuals in areas eligible for federal assistance. This provision isn't retroactive to calendar year 2017. It's prospective and applies to returns filed for calendar years 2018 through 2025.
Stay tuned. In subsequent columns, I’ll discuss other long-cherished deductions that were placed on the chopping block. Some examples: job-related moving expenses, alimony payments, exemptions for dependents, and deductions claimed on Schedule A for payments of state and local taxes, interest on home mortgages and miscellaneous expenses,.
The hodgepodge category of miscellaneous expenses includes such items as job-search expenses, union and professional dues, expenses incurred by investors to produce or collect income, work clothes and uniforms, business gifts.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 225 and counting).