Bill would stop you from paying taxes if you get scammed
A project in Congress would seek to allow victims of scams to deduct losses and avoid tax penalties for retirement withdrawals
Being a victim of a scam could become an even heavier burden come tax season. Today, some people who lost money to fraud may face a second financial hit: paying taxes on resources they no longer have. A new bill in the United States Congress seeks to change those rules and would offer greater protection to those who were deceived.
The proposal, known as the Tax Relief for Victims of Fraud Act and registered as HR 9500, seeks to restore the ability to claim certain theft losses on tax returns, in addition to eliminating some penalties related to early withdrawals from retirement accounts.
The problem arose after changes included in the Tax Cuts and Jobs Act (TCJA) of 2017. That legislation limited the ability to deduct personal losses from theft or accidents, allowing only those related to federally declared disasters.
Although the measure was originally designed to apply between fiscal years 2018 and 2025, the new tax law promoted during President Donald Trump's administration, known as the One Big Beautiful Bill, made that restriction permanent and expanded coverage to include some disasters declared at the state level.
Under current rules, victims of certain frauds, such as romance scams or identity theft cases, generally cannot deduct the lost money from their taxes. Losses from investment fraud may be treated differently because there is an intent to profit, according to tax specialists.
“It's very punitive to not be able to claim the deduction for theft losses,” Matthew Roberts, a tax attorney and partner at Meadows Collier in Dallas, told CNBC.
HR 9500 advanced in the House of Representatives after the Ways and Means Committee approved the initiative on July 1 with a vote of 39 to 0. However, it has not yet been determined when, or if, it will be put to a vote before all representatives.
Scams generate record losses in the United States
The push for this proposal comes at a time when financial fraud has increased considerably. According to the Federal Trade Commission (FTC), consumers reported losses of $15.9 billion during 2025, the highest figure ever recorded.
That amount represents an increase of approximately 27% compared to the $12.5 billion reported in 2024. Since 2020, reported fraud losses have increased nearly 430%, according to the FTC.
Identity theft scams were the most reported during the last year. Although 80% of the people who reported this type of fraud did not lose money, the rest accumulated losses of around $3.5 billion.
However, investment frauds caused the greatest economic damage, with losses exceeding $7.9 billion.
The increase in stolen amounts is also related to a growth in cases where victims lose $100,000 or more, a situation that occurs most frequently among adults 60 years of age or older.
“That's usually because funds are being withdrawn from retirement accounts,” Clark Flynt-Barr, AARP's director of financial security government affairs, also told CNBC.
According to the FTC, adults age 60 and older reported fraud losses of $2.4 billion in 2024. Of that amount, $1.6 billion came from cases in which victims lost at least $100,000, or 68% of the money reported by that age group.
The project would also protect retirement accounts
One of the most relevant points of the proposal is the protection for those who used retirement funds during a scam. Currently, if a person uses money from a traditional 401(k) plan or individual retirement account (IRA) and does not meet the exception requirements, they could face income taxes on that distribution. Additionally, if the victim is under age 59 and a half, they could receive an additional 10% early withdrawal penalty.
The initiative seeks to eliminate that penalty when the withdrawal has occurred as a result of fraud and make it easier for people to recover those funds within their retirement accounts.
The bill would also allow theft losses to be deducted in the tax year in which the fraud occurred, and not only when the victim discovers what happened. Under the current rules, some people may face difficulties because the stolen money may have been taxed in previous years.
“Many retired taxpayers may have no taxable income for years to come after the theft occurs, especially if they lost their retirement funds,” Roberts explained.
The final approval of the measure still depends on the legislative process. In the meantime, experts recommend that people affected by a scam document all available evidence, report the fraud to the proper authorities, and consult with a tax professional before filing their tax return.