The IRS can tax stolen money — and a new bill is finally trying to stop that

So, I am going to need everyone to sit down for this one.

If you get scammed — if someone steals your money, your retirement savings, your entire sense of financial security — the IRS may still send you a bill for it. Not a bill for recovering it. A bill for having had it. Because in some cases, the stolen amount gets counted as income you received, and income gets taxed. I know. I KNOW.

Fraud losses have gone up nearly 430% since 2020, according to the FTC. That’s not a typo. And thousands of victims — a lot of them older adults hit with six-figure losses — are getting a second gut-punch from the tax code on top of everything else. There’s a bill in Congress right now trying to fix this, and honestly the fact that we even need a bill for something this obvious is what’s sending me.

Wait — you actually owe taxes on money someone stole from you?

Yep. That is the current situation for a lot of fraud victims in the United States. Depending on how the stolen funds moved — especially if they passed through accounts the IRS considers “constructively received” — the tax code can treat that money as taxable income even though the victim never beneficially kept a dime of it.

This isn’t some fringe edge case. It’s a structural flaw that’s quietly devastating people who are already devastated.

Why retirement accounts make this so much worse

Retirement-account withdrawals during a scam trigger a brutal one-two punch: you owe income taxes on the amount plus a 10% early-withdrawal penalty if you’re under 59½. Scammers know this. Some of them specifically coach victims to liquidate IRAs or 401(k)s because victims won’t question moving their “own” money.

So the victim loses their nest egg to a criminal, and then the IRS shows up for its cut of the nest egg that no longer exists. That is the system we currently have. That is the thing we are apparently okay with.

Older adults are getting hit the hardest — disproportionately targeted with six-figure losses — and then handed a tax bill on top of it.

What is the Tax Relief for Fraud Victims Act?

H.R. 9500 — the Tax Relief for Fraud Victims Act — is the bill trying to fix this. The short version: it aims to restore theft-loss deductions that got gutted in previous tax legislation, and it would waive early-withdrawal penalties for people who pulled from retirement accounts because they were being scammed.

The idea is basically stop punishing the victim twice. Which, again — shouldn’t need to be a bill. And yet.

Meyer Wilson Werning, a firm that has handled thousands of fraud cases, has been vocal about how urgently this kind of reform is needed. When you’re on the ground watching how many people get blindsided by a tax liability on top of a total financial loss, you understand why this bill matters beyond the policy-wonk level.

Who’s actually getting hit by this right now?

The fraud increase since 2020 — nearly 430% per the FTC — means this isn’t a small population of unlucky people. It’s a wave. Romance scams, investment fraud, crypto schemes, tech support scams — these are sophisticated operations running at scale, and they’re specifically designed to move money in ways that look voluntary on paper.

Which is exactly how you end up with an IRS situation where a victim can’t prove the loss qualifies under current theft-loss rules, or where the withdrawal from their own retirement account gets classified as a taxable distribution rather than money stolen by force.

But what do I know — I’m just a blogger. What I do know is that the FTC’s fraud data is publicly available and it is not subtle.

Does the bill actually have a chance?

Honestly? That’s the part I can’t tell you with any certainty, and I’m not going to pretend otherwise. Congress moves at its own baffling pace and bipartisan support for anything right now is roughly as easy to find as a parking spot on a Saturday in December.

What I can say is that this is the rare issue where the moral argument is so clear-cut that it should have broad support. Taxing stolen money is indefensible. Penalizing someone for pulling their retirement savings out during a crisis they were deceived into is indefensible. The only real debate is how to structure the relief without creating loopholes — which is a legitimate conversation but not a reason to leave victims hanging in the meantime.

The steel-man case for the other side

To be fair — and I do want to be fair here — there are real concerns about fraud-claim abuse if theft-loss deductions become too easy to claim. The IRS has historically tightened these rules because people fabricated losses. That’s a real thing that happened.

The counterargument is that the solution to fraud against the IRS shouldn’t be a policy that runs over actual fraud victims. Documentation requirements, verification processes, coordination with law enforcement — all of that can be built into a reform bill without the current default being “sorry, pay your taxes on the money you don’t have anymore.”

That’s the balance H.R. 9500 is trying to strike. Whether it lands there is something lawmakers and tax attorneys are going to fight about for a while. In my read on how Washington handles financial victim reform, patience is apparently the main requirement.

What can fraud victims do right now?

If you or someone you know has been hit by fraud — especially if retirement accounts were involved — the time to talk to a tax professional is before you file, not after. The current rules are what they are until they’re not, and filing incorrectly can make things worse.

Document everything. Keep records of every communication related to the fraud, every transaction, every penny. If a theft-loss deduction is going to apply, you need the paper trail to prove it.

And honestly? Follow the progress of H.R. 9500. Write your representative. I know that sounds like something people say and then no one does, but on something this genuinely bipartisan in its logic — even if not in its politics — constituent pressure actually moves things. Sometimes. Occasionally. But what do I know.

The fact that we are taxing people on money that was stolen from them is one of those things that sounds made up when you say it out loud. It is not made up. It is the actual tax code.

H.R. 9500 is not a perfect bill — no bill is — but it is pointing in the right direction, and the people it would help are already dealing with more than enough. The least the system could do is stop billing them for it.

If you want to go deeper on fraud victim rights and what Meyer Wilson Werning is doing in this space, their work is worth looking up. These are real cases with real people behind them.

📌 Pin this post