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Ponzi Schemes

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Transcript for Ponzi Schemes

Portia: This is Portia Bingham. I'm talking with Monica Baker about Ponzi schemes.

We are hearing a lot about "Ponzi schemes" in the news these days and it seems many people have lost money through them. Can you tell us how a Ponzi scheme works?

Monica: "Ponzi" is a term synonymous with a pyramid scheme. It's a fraudulent investment operation that promises to pay large returns to the investors.

In reality, it's built like a house of cards, paying returns to early investors out of the money invested by newer investors. The house collapses when the money runs out.

Portia: That sounds pretty straightforward. Is that really all there is to it?

Monica: Well, that's the scheme at its most basic. Promoters have gotten very clever in how they package their so-called "products."

Schemes can take the form of stock, securities or debt instruments and promoters usually promise unrealistic returns to the investors.

A promoter presents a sophisticated investment package to the potential investor, so it can be hard to see these schemes for what they really are. Unfortunately, the result for the investor is a loss of most - or all - of their investment.

Portia: What should a taxpayer do if they think they have been the victim of a fraudulent investment scheme?

Monica: The first step is to gather the facts -- which is sometimes difficult in these situations, since the promoter is unlikely to cooperate.

It's vital to gather all information relating to the investment, including costs and any returns received. Using that information, taxpayers can more accurately determine the amount lost.

These are often unique and complex situations, so taxpayers need to be as thorough as possible in gathering information. That will help them to properly characterize their losses for federal income tax purposes.

Portia: So what are the tax implications if someone has lost money after investing in one of these schemes?

Monica: The IRS recently published guidance on how taxpayers who lost money through fraudulent investment schemes can claim the loss on their federal income tax returns.

We have a good question-and-answer page on Ponzi schemes on our Web site. Just go to IRS.gov and type "Ponzi" in the search box. The page also contains links directly to the published guidance.

Portia: Thank you, Monica. I've been talking with Monica Baker of the IRS. This is Portia Bingham.

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