House tax bill would ease IRS burden on fraud victims

A bipartisan bill in Congress would change how the U.S. tax code treats money lost to scams, potentially reducing tax bills for victims who currently may owe the IRS after funds are stolen. The proposal comes as consumers reported $15.9 billion in fraud losses to the Federal Trade Commission in 2025, the highest figure on record, according to the agency.

The Tax Relief for Fraud Victims Act, H.R. 9500, would remove current limits that generally prevent taxpayers from deducting many personal fraud losses. The House Ways and Means Committee approved the measure on July 1 in a 39-0 vote, sending it further through the legislative process, though timing for consideration by the full House remains uncertain.

Under current rules, many scam victims cannot offset stolen funds with a tax deduction unless the loss is connected to a declared disaster. Investment fraud may be treated differently, according to an IRS memorandum issued in March 2025, because the victim had a profit motive, tax experts said. Other scams, including impersonator and romance schemes, generally do not receive the same treatment.

Victims can face an added liability when fraudsters induce them to withdraw from tax-deferred retirement accounts, such as traditional 401(k) plans or individual retirement accounts. Those withdrawals can count as taxable income. If the account holder is under 59½, a 10% early-distribution penalty may also apply.

Matthew Roberts, a tax attorney and partner at Meadows Collier in Dallas, described the inability to claim a theft-loss deduction as punitive for victims. Clark Flynt-Barr, AARP’s government affairs director for financial security, said the current structure can leave victims treated differently depending on the type of scam involved.

Fraud losses continue to rise

The FTC said reported consumer fraud losses rose about 27% in 2025, from $12.5 billion in 2024. Since 2020, reported losses have climbed nearly 430%, according to the agency.

Imposter scams were the most commonly reported type of fraud last year, the FTC’s latest data show. Of roughly 1 million people who filed imposter-scam reports, 80% said they did not lose money. The remaining 20% reported combined losses of $3.5 billion. Investment scams generated the largest reported losses, at more than $7.9 billion.

The increase in total losses has been driven in part by more consumers reporting losses of $100,000 or more, a pattern most common among adults aged 60 and older, according to the FTC. Flynt-Barr said that often reflects retirement accounts being liquidated. Among that age group, losses of at least six figures totaled $1.6 billion in 2024, or 68% of the $2.4 billion reported lost, according to the FTC’s 2025 annual report to Congress.

How the deduction rules changed

Before 2018, taxpayers generally could itemize unreimbursed personal casualty and theft losses, subject to limits. One constraint was that only losses above 10% of a taxpayer’s income could be deducted.

The Tax Cuts and Jobs Act of 2017 narrowed those deductions for tax years 2018 through 2025, limiting them to losses tied to federally declared disasters. A tax law enacted last year made that limitation permanent and expanded eligibility to include state-declared disasters.

H.R. 9500 would eliminate the disaster-related restriction for personal casualty and theft losses. Flynt-Barr said the bill would restore relief by allowing fraud victims to deduct stolen amounts, reducing much of the tax impact.

The measure would also change timing rules for theft-loss deductions. It would let taxpayers claim the deduction for the year the loss occurred, rather than the year the fraud was discovered. Roberts said current rules can be difficult for retirees who may have little taxable income in later years after losing retirement savings.

The bill would waive the 10% early-withdrawal penalty when applicable and make it easier for victims to replace retirement funds withdrawn during a scam, experts said. Current contribution limits and account rules can make that process difficult.

This story draws on original reporting from CNBC.