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Posted by D. Stussy on September 7, 2008, 10:13 pm
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> "NadCixelsyd" wrote:
> >A neighbor was just indicted for embezzlement. Here are the facts
> > assumed from newspaper articles:
>
> Rarely a safe assumption, but...
>
> > 2004: embezzle $145,000 but does not declare it on the tax return
> > 2005: embezzle another $245,000, but does not declare it on his tax
> > return.
> >
> > August, 2008: He is arrested for embezzlement. The entire $390,000
> > is refunded in an effort to mitigate the criminal charges.
> >
> > The IRS has been notified. OK, he "under reported" his income in 2004
> > and 2005, but what happens (tax wise) in 2008 when his total income is
> > only $130,000?
>
> Assuming he's a cash-basis taxpayer (almost every individual is) he filed
> false returns for 2004 and 2005. IRS will be chatting with him about this
> from the civil side. (I'm assuming he has a good enough lawyer that the
> criminal aspects of the 2004 and 2005 returns are already being dealt
with.)
>
> He may be able to generate a deduction or credit for the year of
repayment.
> See IRS Publication 525.
In this case, he's NOT entitled to a claim-of-right deduction because he's
being CRIMINALLY prosecuted. The courts have generally ruled that an
embezzler can use the CoR method only when civilly sued by the victim
without prosecution. (I did this research in the early 1990's when I still
worked at the IRS and was auditing an embezzler).
Authority: IRC 162(f). Repayment in a criminal case is often part of the
fine or penalty.
> > And just out of curiosity, what would happen if he HAD declared the
> > embezzlement on his 2004 & 2005 tax return?
>
> Well, he wouldn't have any IRS problems on top of his other legal
problems.
> He'd probably also make the cover of Time magazine as the only person on
> record to do so. Come to think of it, he probably should anyway since he
> hadn't yet frittered away the money and had it to repay the victim when he
> got caught.
I concur. No tax due as it's already paid.
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