Megan L. Brackney and Malena Solin write in a recent article for MYCPE ONE Insights about recent IRS guidance that bars victims of so-called “romance scams” from claiming a theft loss deduction on their taxes in the hopes of mitigating their losses and the potential tax consequences that could arise from transactions they made as victims of the scam.
The guidance, released as IRS Chief Counsel Memorandum 2025110153 on March 14, 2025, is related to changes made to the theft loss deduction in the Tax Cuts and Jobs Act of 2017 (the TCJA), which currently applies to tax years 2018-2025. TCJA eliminated the casualty and theft loss deductions for individuals, other than to the extent that casualty losses resulted from a federally-declared disaster.
The March 2025 IRS memo clarifies that “victims of romance scams who hope to claim a theft loss deduction will not be able to do so because these victims’ losses did not result from a transaction entered into for profit,” the article asserts.
The memo comes even as romance scams have been proliferating in recent years. In 2018, romance scam losses amounted to $143 million, more than the losses for all other types of consumer fraud in the U.S. And the trend has increased over the years, with the Federal Trade Commission finding that romance scam losses accounted for over $1.2 billion in 2024.
For many victims of romance scams and other personal loss scams, such as fake kidnapping, the TCJA’s theft loss provisions present a double hardship. “For example, certain scam victims who are convinced to liquidate brokerage accounts may face capital gains tax incurred on funds that have since been stolen, though they are unable to claim a theft loss deduction. Not only have the victims lost their assets, but they are also left with tax debt,” the article states.
Megan and Malena explain that taxpayers in affected by the TCJA’s provisions may have few options to avoid paying taxes on capital gains on funds that were lost to scammers, unless the taxpayer has personal casualty gains that can offset the loss in the year in which the taxpayer discovers the scam or the loss is somehow attributable to a federally declared disaster.
Because there is no way to reduce the tax burden caused by the scam, the best option for scam victims may be in obtaining an Offer in Compromise (OIC) based on effective tax administration. As the article advises, “Treas. Reg. § 301.7122-1(b)(3) states that the IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability. The Internal Revenue Manual (“IRM”) specifically includes a criminal or fraudulent act of a third party that is directly responsible for the tax liability as a ground for relief.” Because romance scam victims may be able to prove – as required by the IRM – that their loss has a “very close nexus” to the incurrence of the tax liability, they may qualify for an OIC and relief.
Read the entire article here.
About Megan
Megan is a tax controversy attorney with a distinguished track record of delivering exceptional results for clients facing complicated and difficult tax issues. The current Chair-Elect of the American Bar Association Section of Taxation, she is also a frequent speaker and contributor to local and national conferences on taxation, ethics in tax practice, IRS penalties, and civil tax controversy.
About Malena
Malena Solin is a pre-law paralegal who graduated magna cum laude from the University of Chicago in June of 2024 with degrees in Public Policy Studies and English Language and Literature.
