Since news of the Bernard Madoff scandal broke, we have been monitoring the facts surrounding the situation and evaluating possible recovery methods for investors from a tax perspective.
Investors who lost money with Madoff may be entitled to tax refunds. Investors who reported taxable income from investments may be able to file amended tax returns since the income allegedly generated from their Madoff investments may not have been income, but a non-taxable return of capital. Other possible recovery methods include the reporting of theft or capital loss deductions. Regardless of the recovery method pursued, investors will be restricted by applicable statutes of limitations.
There is much uncertainty surrounding tax recovery theories, and the Internal Revenue Service has not yet made an official statement. The Government may also seek to recover funds from investors who made a profit on their Madoff investments. Investors should seek legal advice prior to making any decisions.