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Audit Process for Theft Loss Claim (New York State)



After you have filed your taxes and claimed Theft Loss Deductions for the Pig Butchering Scam (a hybrid relationship-investment fraud), be prepared for an IRS audit, both for US federal and state audits. Below is a recounting of one victim's experience with the audit from the State of New York. Please note that each state has its own auditing process, but the experience below is to give you an idea of the process, and how to prepare for it.


DISCLAIMER: This post is only a narrative expedience of an individual and should not be relied on as tax advice. Please consult with tax attorney or tax professional.



Question: Can you please give us a little background about your case?


My scam involved Forex on MT5. My scammer manipulated the MT5 interface to display fake data and fake balance, which both appeared to be real. I found out that this was a scam when I tried to withdraw the money, and they told me to pay for all these fees.



Question: How did you file your losses for 2020 taxes?


A CPA firm helped me with my 2020 taxes. They filed my losses under Form 4684 Section B and C (filled out both sections). Section B Part 1 is for “Casualty or Theft Gain or Loss”, and section C is for “Theft Loss Deduction for Ponzi- type Investment Scheme”.



Question: What documents did the State of New York ask for when they were auditing your taxes?


First, you will receive a letter in the mail notifying you that the IRS will be auditing your taxes. Please be careful with IRS scams. The IRS will not call you up; they will notify you first through the mail. Then there was a form to fill out, scan, and upload to the New York state tax site. The form will ask you why you are not paying taxes and a brief description of the scam. Along with the form, I also sent in the FBI document from the Victim Specialist that stated how much I lost. After I submitted the forms online, about 2-3 weeks later, I received a call from the New York State Auditor asking for evidence to support my claim for losses. I sent the following items to back up my claims for the theft loss:

  1. Bank wire transfer confirmations

  2. Company registration documents (in my case, my scammer registered their company in the UK and Hong Kong )

  3. Screenshots that show your name, account #, brokerage, account balance on the fake trading site

  4. Screenshots of text messages from scammers showing you how to do trades

  5. IP addresses of brokerage website

  6. Screenshots of brokerage website

  7. Chat transcript of the customer service (scammer) telling you where to send the money

The New York State auditor told me not to go crazy with the amount of evidence I send to them.



Question: What did you say to the auditor? How did you present your case?


I mentioned that there was an investment scam and that I entered into this for profit. However, the site won't let me withdraw the money. I kept it short and simple.



Question: How long was the auditing process?


The auditing process was about 1-2 months for me. Then after the audit, I got my money about a month later.



Question: How will you file your carry-over deductions for 2021 taxes?


The accounting firm I used will help me again with my 2021 taxes. They will file it in the same section for theft loss for carrying over as 2020. The IRS has about 3 years to audit me for the federal tax refunds.



Even though the victim above did not need the police report for his case, we do recommend that you have all the police, FBI, SEC, etc reports in hand and ready in case if other auditors ask for them.


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