If you or someone you know has fallen victim to an online scam or identity theft, there’s finally good news from the IRS. In a recent legal memorandum—ILM 202511015—the IRS took a major step forward in helping taxpayers recover some of their losses through the tax code.
This guidance brings clarity and relief for victims of common online scams by showing when and how they can deduct losses on their tax returns. At a time when online fraud is at an all-time high, this ruling could mean real money back in the hands of everyday people.
- Tax Deductions Are Now Clearly Allowed for Some Scams
If the scam involved a profit motive—such as you thought you were making an investment—the loss may be deductible under IRC § 165(c)(2). This applies to pig-butchering and phishing scams, where the victim acted with an intent to make money.
That means you might be able to write off the loss on your tax return.
- The Right Year to Claim the Deduction
The deduction is allowed in the year when the victim discovers the theft and determines there’s no reasonable chance of recovering the money—not necessarily the year the scam occurred. This gives taxpayers more flexibility in reporting the loss.
- Romance and Personal Scams? Not Deductible (For Now)
The IRS said losses from scams without a profit motive (like romance or kidnapping scams) are personal in nature and therefore not deductible under current tax law (due to limitations from the 2017 Tax Cuts and Jobs Act).
- Claim Only What You Invested
Your deduction is based on your basis—usually the amount of money you actually lost. You can’t claim the “market value” of the promised investment or inflated returns.
- No Safe Harbor Like Ponzi Schemes
The IRS made it clear these scams do not qualify under the special Ponzi scheme tax relief rules in Revenue Procedure 2009-20. But that doesn’t mean you’re out of luck—just that you need to file using traditional theft-loss rules.
If you were scammed in 2023, 2024, or 2025, this IRS memo might apply to you. Work with a tax professional who understands theft-loss deductions and can help prepare a claim that holds up under IRS scrutiny.
Being scammed is painful. But with the IRS’s new guidance, there’s finally a path forward—one that can provide meaningful tax relief for those who acted in good faith and suffered real losses.
Don’t let the scammers win twice. Let us help you explore whether ILM 202511015 can help you take back some control—starting with your next tax return.
At Thinking Outside the Box Law, Inc., we specialize in both tax law and financial crisis recovery. Our unique focus on tax and bankruptcy law means we see the big picture—and we know how to use every available tool to help you recover.