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Employee Theft Loss

Technical topics regarding tax preparation.
#1
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My client had a theft from his employee of cash in the amount of $450,000. This was discovered on 12/15/19 and he just repaid 100,000 in 2020. My question is client is not sure if he wants to go through the insurance and not sure if the employee will repay the balance. I am thinking since theft was discovered in 2019, I can write off the balance of the loss. If they subsequently collect the remaining 350,000 , I will pick it up as income in the year it is received. I know you can deduct a loss in the year is is discovered, but I am unsure because it could be noncollectable? Any help is appreciated. Client operates business as a S corporation.
 

#2
Nilodop  
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There are a bunch of rules that apply, one of which, IIRC, is you don't get to claim the loss if there was insurance and you chose not to use it. Again, IIRC.
 

#3
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Thank you for your reply. Do you know where I can find this information?
 

#4
lckent  
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If the client is cash basis and the employee understated income or overstated expenses, the "loss" probably has already been reflected in taxable income. Is there anymore to deduct?
 

#5
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The client did not understate income. Cash is part of inventory and employee stole the money.
 

#6
sjrcpa  
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I hope this is ex employee. Did they report this to the police?
 

#7
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not yet and YES it is an ex employee. I am trying to do what is best for my client. Question, if I do put a claim in for the insurance company can I write off the bad debt in 2019. If we get the money back then it will be recovery of income. -Thank you for your help,
 

#8
sjrcpa  
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As Nilodop said, No. If you have a loss that is covered by insurance and do not submit a claim you cannot deduct the loss.
 

#9
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Ok thank you. Scenario # 2- If my client does put in a claim, I am not sure what the reimbursement is -can I deduct the loss in the year discovered (2019) and when reimbursed just claim it as recovery of income.?
 

#10
Nilodop  
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Here's the reg.
(2)

(i) If a casualty or other event occurs which may result in a loss and, in the year of such casualty or event, there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained, for purposes of section 165, until it can be ascertained with reasonable certainty whether or not such reimbursement will be received. Whether a reasonable prospect of recovery exists with respect to a claim for reimbursement of a loss is a question of fact to be determined upon an examination of all facts and circumstances. Whether or not such reimbursement will be received may be ascertained with reasonable certainty, for example, by a settlement of the claim, by an adjudication of the claim, or by an abandonment of the claim. When a taxpayer claims that the taxable year in which a loss is sustained is fixed by his abandonment of the claim for reimbursement, he must be able to produce objective evidence of his having abandoned the claim, such as the execution of a release.

(ii) If in the year of the casualty or other event a portion of the loss is not covered by a claim for reimbursement with respect to which there is a reasonable prospect of recovery, then such portion of the loss is sustained during the taxable year in which the casualty or other event occurs. For example, if property having an adjusted basis of $10,000 is completely destroyed by fire in 1961, and if the taxpayer's only claim for reimbursement consists of an insurance claim for $8,000 which is settled in 1962, the taxpayer sustains a loss of $2,000 in 1961. However, if the taxpayer's automobile is completely destroyed in 1961 as a result of the negligence of another person and there exists a reasonable prospect of recovery on a claim for the full value of the automobile against such person, the taxpayer does not sustain any loss until the taxable year in which the claim is adjudicated or otherwise settled. If the automobile had an adjusted basis of $5,000 and the taxpayer secures a judgment of $4,000 in 1962, $1,000 is deductible for the taxable year 1962. If in 1963 it becomes reasonably certain that only $3,500 can ever be collected on such judgment, $500 is deductible for the taxable year 1963.

(iii) If the taxpayer deducted a loss in accordance with the provisions of this paragraph and in a subsequent taxable year receives reimbursement for such loss, he does not recompute the tax for the taxable year in which the deduction was taken but includes the amount of such reimbursement in his gross income for the taxable year in which received, subject to the provisions of section 111, relating to recovery of amounts previously deducted.

(3) Any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers the loss (see § 1.165-8, relating to theft losses). However, if in the year of discovery there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained, for purposes of section 165, until the taxable year in which it can be ascertained with reasonable certainty whether or not such reimbursement will be received.
 

#11
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Thank you for your help!

" If a casualty or other event occurs which may result in a loss and, in the year of such casualty or event, there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained, for purposes of section 165, until it can be ascertained with reasonable certainty whether or not such reimbursement will be received."


Question does a claim exist if policy holder has an insurance policy but does not file for reimbursement or benefit?
 

#12
Nilodop  
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From the Pub (which is based on something):
Failure to file a claim for reimbursement. If your property is covered by insurance, you should file a timely insurance claim for reim- bursement of your loss. If you don’t file an insur- ance claim, you can’t deduct the full unrecov- ered amount as a casualty or theft loss and only the part of the loss that isn’t covered by your in- surance policy is deductible.
The portion of the loss usually not covered by insurance (for example, a deductible) isn’t subject to this rule.
Example. Your car insurance policy in- cludes comprehensive coverage with a $1,000 deductible. Because your insurance doesn’t cover the first $1,000 of damages resulting from a storm, the $1,000 is deductible (subject to the $100 and 10% rules, discussed later). This is true, even if you don’t file an insurance claim, because your insurance policy won’t reimburse you for the deductible.
 

#13
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Thank you very much
 

#14
Nilodop  
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It seems to me the IRS is questioning the taxpayer's judgment on the issue of whether to file a claim. Maybe taxpayer is on verge of a big jump in premiums or even a loss of coverage because of prior history of claims. Why should he lose the deduction in those circumstances? What if he did not even have ins. coverage? Then he's OK with getting a deduction? Seems bass-ackwards to me.
 

#15
jon  
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According to your #5 cash is part of inventory?? If he stole an asset and the asset is overstated by $450,000 then you have never taken a loss. The form in processing makes you state that if covered by insurance it has to be submitted. Based on your response on #5 Inventory and Cash have been overstated by the $450,000 on tax returns when filed. Police report, insurance filings, even the Insurance company may go after or insist you go after the ex-employee. If after everything is filed and settled you may have a loss. Move the $450,000 to an account called "due from" and start the process.
 

#16
Nilodop  
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According to your #5 cash is part of inventory??. I too wondered what that meant. Is client in the check cashing business, or a finance company, or a bank? Is cash ever inventory?
 

#17
makbo  
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Nilodop wrote:It seems to me the IRS is questioning the taxpayer's judgment on the issue of whether to file a claim.

No, not questioning it, simply considering it completely irrelevant. Similar to an unreimbursed employee expense that could have been claimed but wasn't. Also, I strongly suspect the insurance policy requires all claims to be reported to the insurer whether or not the insured wants to do so. If the IRS said, "you can skip filing a claim and take a tax deduction instead", that would seem to be undue interference in the contract between the insured and insurer.

Nilodop wrote: Maybe taxpayer is on verge of a big jump in premiums or even a loss of coverage because of prior history of claims. Why should he lose the deduction in those circumstances?

Because (a) he deducted the insurance premiums he paid, and (b) why should I and the other taxpayers take the place of the insurance company in making up for his risky business practices? He didn't pay us any premiums, did he?
Last edited by makbo on 17-Jan-2020 9:26am, edited 2 times in total.
 

#18
NEcpa  
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I wonder how the theft occurred and reporting in prior years, i.e. was it pure cash taken, or did the thief run it thru the company by overstating maybe payroll, via credit card-overstating expenses to the Corp, etc.
What happens to those overstated expenses if not pure cash taken?
 

#19
Nilodop  
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Because (a) he deducted the insurance premiums he paid, and (b) why should I and the other taxpayers take the place of the insurance company in making up for his risky business practices?. You mean like you and the other taxpayers subsidize all the business risks taken by millions of businesses, along with their other poor judgments in areas that result in deductions and credits?
 

#20
makbo  
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Nilodop wrote:Because (a) he deducted the insurance premiums he paid, and (b) why should I and the other taxpayers take the place of the insurance company in making up for his risky business practices?. You mean like you and the other taxpayers subsidize all the business risks taken by millions of businesses, along with their other poor judgments in areas that result in deductions and credits?

No, I don't mean that. We don't subsidize business expenses that are not ordinary and necessary business expenses, so your comparison falls apart. An ordinary and necessary business expense includes reasonable insurance coverage. See also my added comment to my previous post while you were posting yours.
 


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