How long to wait before filing theft loss?

[NECPA in NEBRASKA]

There is an insurance company in my state that is currently being investigated for fraud, illegal sales of notes and has declared bankruptcy. No actual charges have been filed, but the FBI and numerous state agencies are in there and they took the insurance licenses of the principals away. All but one of the principals has declared personal bankruptcy. They have apparently lost 100s of millions of dollars in what appears to be a Ponzi scheme. Who knows where the money went and somehow some of the companies are licensed as native american and that may make the money unrecoverable even if there is any left. My question is, I have an elderly client that received a 1099 INT for $35,000 and I would like to find some way to show it as return of principal if it is even possible. The investors have been told that recovery is very unlikely, but there is nothing concrete, because this just became public in January, 2009. His original investment was $250,000 plus he has been paying taxes for many years on this purported interest. He doesn't have the money to pay the tax on this, because the monthly checks that he was living on stopped in November. All he has left now is SS, which of course is mostly taxable because of the interest income. Sorry that this is so long. I've been researching Madoff, but this hasn't been public for as long. Does anyone have any ideas or should I just wait until the charges are filed and amend?

Thank you,

Bonnie

[Julie]

Since they are bankrupt, your client's odds of recovery are just about zero. How about a casualty loss claim?

[NECPA in NEBRASKA]

Thanks! That is definitely a possibliity. I'm still trying to research if I need to wait before I file anything.

[RoyDaleOne]

This is an area where the IRS has all the cards. Hind sight that is.

Very difficult to make the correct choice.

[JohnH]

In any ambiguous situation, I've always understood that the general priniciple is you should take the loss on the earliest possible return. This guards against the possibility of losing the loss in a subsequent audit, where the auditor finds evidence that the loss should have been taken in an earlier year and that year is closed at the time of the audit. On the other hand, if a subequent audit determines you definitely should have waited until a later year, the only thing you would lose would be some interest and maybe a small penalty.