Business Theft?

Technical topics regarding tax preparation.
#1
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Got a call involving a scam. It was one of these situations where the taxpayer transferred bank account funds to the perpetrator and also transferred funds via gift card.

These funds came out of a business bank account. The bank account is the name of the husband and wife, but it was used exclusively for the husband’s sole proprietorship business. The wife works in the business and she is the one that that got scammed.

Do we have a Schedule C theft loss deduction (forgetting about year of discovery and prospect of recovery)?
 

#2
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If it was the business that was targeted and the wife was acting on behalf of the business I'd be comfortable with a business theft loss assuming all the Is are dotted and Ts are crossed.

Per IRS Pub 547: The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law.
 

#3
Nilodop  
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So do we classify it between personal and business theft loss based on how the asset was used (business, per OP), or how it was titled (personal, per OP, though as a proprietorship that seems not so important, plus I wonder if the business had a trade name that could have appeared on the account). I'd lean toward how the asset was used. But I'd want to read the regs. and other authorities, if any are on point.

Or do we try to ascertain whether the thief/scammer knew it was a business account, or simply assumed it was a personal account, or, more likely, did not care what kind of account it was. Or does what the thief thought even matters.

I used periods rather than question marks because those above questions are rhetorical.
 

#4
Nilodop  
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1.165-7 uses the phrase "not connected with a trade or business" and "not used in a trade or business" to describe thefts that are personal. That seems pretty good for OP.
 

#5
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If it was the business that was targeted


I will get some clarity around that, but I think the answer is “yes.”

As to Nilodop’s comments…the thing that’s quirky about this situation is that it was the taxpayer that caused the funds to be extracted from the account. So, the thief didn’t do it directly. I’m pretty sure, though, that the thief told the taxpayer to pull funds from the “business” account (to ManVsTax’s point). I don’t think it matters what the thief thought, per se. If you think about a “ransom” situation and a thief says, “Give me $10k and I’ll give you access to your computer back,” and you withdraw funds from a business account to pay the thief, I think what would be relevant here is whether or not the computer was used for business purposes. I don’t think paying off a thief with business funds automatically gives you a business theft deduction. There has to be some connection to the business, as you guys are pointing out. Now, if a thief steals directly from a business account, I think that is a clear business theft. And I kind of think that’s how this situation should be treated if the thief targeted the business account, which I think he did. But I’ll get the “client” to clarify.

The situation is pretty intricate and the FBI has been involved. The lady was having some issue with her computer and thought it had been compromised. She calls Microsoft. Microsoft tells her to Google the bank’s 1-800 fraud line, which she did. But, apparently, the fraudsters (overseas) hijacked the bank’s 1-800 number…or at least intercepted some of the calls made to it. So, the woman, who thinks she is talking to the bank, is instead talking to a fraudster. The fraudster tells her (I’m pretty sure) that the business account has been compromised and that she needs move money out of it to prevent loss and into a “new” account that the bank has created for her. Fraudster also tells her to buy a bunch of gift cards and email them to the “bank” so that bank can deposit them into the new account. The lady does all of this, to the tune of $105k.

On top of this, the fraudster convinces her to do the same with respect to a joint account held between the lady (who is in her 60’s) and her elderly mother (who is in her 90’s). So, the lady does this as well, to the tune of $15k or $20k.

And on top of all of this, the fraudster convinces her to buy a bunch of gift cards on her AMEX, which she does, to the tune of $20k or so. Those too got transferred to the fraudster.

And then there’s the IRA…fraudster tells her that her IRA account has been compromised and that she needs to withdraw the funds asap. She does this, to the tune of $110k [$60k + $50k]. But before transferring the funds to the fraudster, she realizes she has been swindled and, ultimately, the thief doesn’t get any of these funds. She was able to re-contribute $60k back to her IRA. When she went to re-contribute the other $50k back into her IRA, the custodian says, “Sorry, but you’ve already done 1 rollover in the 12-month period, so we can’t accept the $50k.”
 

#6
Nilodop  
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But I’ll get the “client” to clarify.. Why the quote marks?
 

#7
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Generally, in these scams, there is an email, pop-up, phone call, or something that tells the person there is something amiss on the computer and to call a number purported to be Microsoft.

When she did as directed, she was playing into their hands as the number did not belong to microsoft.

Also, heads up. If you get an email from the Outlook Team, it may not be Microsoft either. Beware of spoofs.
 

#8
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Why the quote marks?


This isn’t an existing client. We got the referral from an attorney. Situation was run by the person’s current CPA who basically said, “Personal thefts are no longer deductible, but if you have some additional details, I’m all ears.” While the other CPA didn’t entirely give this person short shrift, CPA also didn’t did into the nitty gritty details, at least in their initial conversation.

Ok, I talked to the “client” this morning. She confirmed that the fraudster did indeed target the “business” account. The “client” actually gave the fraudster access to her computer, thinking it was a bank employee. At which point, fraudster sees the bank account (or the lady told the fraudster about it) and the fraudster said, “That account has been compromised. Here, we’ll open a new account for you. Let’s transfer all the money from the business account into the new create I’ll set up for you and we’ll also effect the transfer using gift cards.”

Generally, in these scams, there is an email, pop-up, phone call, or something that tells the person there is something amiss on the computer and to call a number purported to be Microsoft. When she did as directed, she was playing into their hands as the number did not belong to Microsoft.


Could be, but what she told me is spelled out in the second full paragraph of Post #5. She did call Microsoft. I am not sure why caused her to make that call (a pop-up, phone call, etc.). In any case, the Microsoft person (if it really was Microsoft) told her to Google the bank’s 1-800 fraud hotline. She did, then she called that number. She claims it really was the proper 1-800 number for the bank, but indicated that the number had been compromised such that the fraudsters intercepted her call. Sure sounds odd, but she insists. When talking about it, I said, “Oh, the fraudsters must have posted a bogus 1-800 number on the web.” She said, “No. It really is the bank’s correct fraud hotline number.”

The is the second time this week I’ve heard of someone Googling a customer service number only to later find out there’s some impropriety with it. The other instance didn’t involve a monetary theft, but the person Googled a customer service number and called it, only to later learn it was a bogus number operated by fraudsters. The situation involved a utility company. The lady’s power went out and she called the utility’s 1-800 number, thinking that maybe a payment didn’t post and her power got cut off. She just recently moved into the house. They told her they couldn’t find the account and needed her SSN, which she gave them.
 


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