A clawback is when a trustee recovers money from an investor who profited from the Ponzi scheme.
You can either deduct the amount of money that you have paid as a clawback of profits in the year you paid it and then use that deduction to accomplish tax refunds or there is a very unique code section that we’re going to focus on. That’s a code section that allows you in certain circumstances to actually go back when there is a closed year from the statute of limitations when you have made profits in that closed year.
You cannot go back and get a deduction in that closed year. However this special code section does allow you to actually go back to the closed year reopen the statute of limitations so long as you’ve met the requirements and to actually get a tax refund from profits that you made in a closed year that you would not otherwise have been able to do their clawback can come many years after the Ponzi scheme has run its course and there is the right to either take a deduction in the year that you pay the clawback or the right to go back.
We call it the mitigation section to mitigate your losses by going back to the year in which you made your profits.
And if those years your profits were going to bring you more of a tax refund than just taking a deduction you’re allowed to go back and actually get the larger tax refund.
Now we have to keep in mind that starting with the new Trump Tax Cuts and Jobs Act of 2017 – whereas in the past if you took a deduction you could go back several years if the statute limitation was open and file amended returns in those years to claim deductions if you had a loss. That’s not the law anymore.
So from this point on — under the new Trump tax bill — all you can do is carry your losses forward and that can often mean that you’re not taking the most advantage of your losses because now you’re in a different tax bracket you’re not working as hard your income has gone down and therefore using the deductions going forward are not going to bring you the same kind of refunds as you would get if you’re able to go back and take the deductions or to eliminate the income in the years you made the profits.
Learn more about the value of the Mitigation Procedure in this educational video: