Taking Aim at the IRS's Definition of Theft Losses, but New Tax Law Suspends Write-offs

theft losses

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.

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About Julian Block

Julian Block

Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com


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