WASHINGTON, DC – Today, the Senate Finance Committee held a hearing in response to a letter sent by U.S. Senators Maria Cantwell (D-WA), Charles Schumer (D-NY) and Robert Menendez (D-NJ) on the tax implications for investors defrauded by Bernard Madoff and in the other Ponzi schemes. Thousands of individuals, pension funds, and foundations invested with Madoff and had their life savings wiped out by this scam. During the hearing, Cantwell focused on the role that lax enforcement of securities laws played inn allowing this scheme to occur for so long and called for increased collaboration and cooperation between federal regulators to protect taxpayers from future losses, and help institutions recoup their losses. Madoff defrauded about 8,000 investors of more than $50 billion. At least 16 Washington state individuals and foundations were on Madoff’s list of investors.

 

“Our financial markets are suffering from a crisis of confidence right now,” said Cantwell. “And, adding insult to injury are situations like the Madoff scam and other schemes which have swindled honest investors out of their future financial security. If confidence is going to return the marketplace, investors need greater certainty that they will not be as susceptible to such fraud and that they won’t be further victimized by the tax system. Honest investors should not be further victimized by the tax system. I hope that by focusing on the cost of cleaning up the Madoff mess we can show that taxpayers and investors do better when regulators function as the cop on the beat, not just the swat team in an emergency. The IRS can and should be an active player in regulatory oversight and Congress should make sure there is better coordination among the various regulators responsible for protecting investors and taxpayers."

 

Cantwell also applauded the work of the Internal Revenue Service in providing timely tax guidance to help victims recover some of the funds that were stolen. The IRS is issued two guidance items to assist taxpayers who are victims of losses from Ponzi-type investment schemes. The first item is a revenue ruling that clarifies the income tax law governing the treatment of losses in such schemes. The second is a revenue procedure that provides a safe-harbor method of computing and reporting the losses.

 

The revenue ruling is important because determining the amount and timing of losses from these schemes is factually difficult and dependent on the prospect of recovering the lost money (which may not become know for several years). In addition, it clarifies the reach of older guidance on these losses that is somewhat obsolete.

 

The revenue procedure simplifies compliance for taxpayers and administration for the IRS by providing a safe-harbor means of determining the year in which the loss is seemed to occur and a simplified means of computing the amount of the loss.

 

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