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Overview
Increasingly, scammers are conning taxpayers into taking money from their tax-deferred accounts, such as a 401(k). When taxpayers fall victim to these scams, they sometimes face dual implications: their money is stolen, and they must pay tax on all or part of these stolen funds.
When a taxpayer withdraws money from a tax-deferred account, the taxpayer and the IRS receive a Form 1099-R, which reports the distribution. Taxpayers must report this income on their tax return unless it is excluded by law.
If you withdrew or transferred money from your tax-deferred account, even if the money was stolen, you must report the distribution amount on your income tax return. The distribution amount is usually reported on a Form 1099-R.
A Form 1099-R tells both you and the IRS when there are distributions or designated distributions of $10 or more from:
To determine how to report the distributions from your pension or annuity for theft loss see Publication 17, Your Federal Income Tax and Publication 575, Pension and Annuity Income.
To determine if the Form 1099-R distributions are taxable, see Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs) or Publication 560, Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans).
A theft loss is what it sounds like – it’s a loss due to a theft. Theft is the taking of money/property with the intent to deprive the owner of it. The taking must be illegal under the state law (or other jurisdiction) where the theft occurred and you have no reasonable prospect of either recovering the loss or otherwise being compensated, such as through insurance.
It depends. Individual taxpayers with theft losses are allowed a deduction for tax years 2018 through 2025 if the loss is:
All other personal casualty losses are not deductible under the Tax Cuts and Jobs Act of 2017. You are limited to what you can take and when. See “How do I deduct my theft loss for tax years 2018 through 2025?” for limitations on when and how much you can deduct for a theft loss.
On March 14, 2025, the IRS Office of Chief Counsel released advice memorandum number 202511015, addressing the deductibility of theft losses under IRC § 165 for scam victims. Just because you’re a victim of a scam doesn’t mean you can deduct the loss on your tax return. For example, romance or kidnapping scam victims can’t deduct the theft loss. However, taxpayers who fall prey to certain schemes involving a profit motive can potentially deduct these theft losses on their tax return.
If you withdrew money from a tax-deferred account, you might also owe an additional tax, sometimes called an “early withdrawal penalty.” To find out if you are exempted from this additional tax see Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts.
To determine how to calculate your deductible theft loss see “About Form 4684, Casualties and Thefts” and Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property).
As a victim of a theft loss, you might find yourself unable to pay your balance in full. The IRS offers several options to make payments online either using your online account (which uses your bank account), debit card/credit card (the financial institution may charge a processing fee), or digital wallet. Paying any amount will help reduce future penalties and interest.
The IRS offers various payment plan options, including the ability to apply online for a payment plan. If you owe $100,000 or less, you can request a payment plan through your online account which might reduce your user fee. You will need to create an IRS Online Account. Then you can apply for a payment plan online without needing to call, mail, or visit the IRS. Regardless of your balance, you can also request a payment plan via Form 9465, Installment Agreement Request, or by calling the IRS at 1-800-829-1040.
You may also qualify for Currently Not Collectible Status. The IRS will analyze your ability to pay based on your income and expenses, and if the IRS agrees that you cannot currently pay, it generally will suspend collection actions. However, penalties and interest will continue to accrue while the IRS suspends your account. The IRS may file a Notice of Federal Tax Lien (NFTL) while your account is suspended. You may appeal the filing of the NFTL before or after the IRS files it.
A Notice of Federal Tax Lien gives public notice to creditors of the IRS legal claim against all your current and future property. Under the Collections Appeals Program, if you disagree with an IRS employee’s decision regarding a Notice of Federal Tax Lien before it is filed and want to appeal it, you can ask to have a conference with the employee’s manager. If you then disagree with the manager’s decision, submit a Form 9423, Collection Appeal Request, as outlined in Publication 1660. Let the Collection office know within two business days after the conference with the Collection manager that you plan to Appeal. You have a right to appeal the NFTL after it is filed by submitting a Collection Due Process (CDP) request. If a NFTL is filed you will be sent Letter 3172, Notice of Federal Tax Lien Filing and Your Rights to a Hearing Under IRC 6320, by certified or registered mail. This notice will provide you with instruction on how to request a CDP hearing and when the request must be submitted.
Understanding your notice or letter
For more specifics on your notice, visit Understanding your IRS Notice or Letter on IRS.gov
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Low Income Taxpayer Clinics (LITCs) assist individuals whose income is below a certain level who need to resolve tax problems with the IRS. They also provide education, outreach, and information on taxpayer rights to individuals who speak English as a second language. LITCs represent taxpayers in disputes before the IRS and courts and help taxpayers respond to IRS notices and correct account problems. Services are offered for free or a small fee. LITCs are independent from the IRS and TAS. For more information or to find an LITC near you, see the LITC Page or Publication 4134, Low Income Taxpayer Clinic List. You can also request Pub. 4134 by calling 800-TAX-FORM (800-829-3676).
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