TAX SCAM OF THE WEEK: Compromised Account Scams

If you’ve ever picked up the phone and heard someone say they’re calling from your bank’s “fraud department,” you’re not alone. This month, we’re breaking down a scam that’s becoming far too common—the compromised account scam.

Here’s how it typically works:

Someone posing as a bank or financial institution representative contacts you, saying your account has been hacked. They might call, email, or even send what looks like a legitimate message from your bank. Their tone is urgent, and their instructions are clear: move your money immediately to a “safe” account to protect it.

That’s exactly what happened to one taxpayer in a recent IRS case. Thinking they were protecting their retirement savings, they authorized transfers from both IRA and non-IRA investment accounts.

What they didn’t know was that they were moving money directly into the scammer’s hands. By the time the theft was discovered, the funds had been moved overseas and were gone for good.

So what happens from a tax perspective?

If you’re in this situation, there may be some relief. The IRS recognizes this type of loss as a theft—if the funds were part of an investment transaction and there’s no reasonable prospect of recovery. In plain terms, if you moved the money believing you were reinvesting or protecting your investments, and the money’s gone, you might be eligible to deduct the loss.

A few key points:

• You must have had a profit motive when moving the funds. Just trying to protect your money counts.
• The deduction is only allowed for the amount you originally invested—not the potential value the account might have grown to.
• The loss must be claimed in the year you discovered it and realized you wouldn’t be able to recover the funds.
• Losses from retirement accounts like IRAs may still be subject to income tax, even if stolen.

It’s not the most uplifting news, but knowing your options helps you respond clearly and quickly.

KRS Tip: If someone calls or messages you claiming to be from your bank or investment firm, don’t act on it immediately. Hang up, call the institution directly using a number from your statement or official website, and verify the claim.

We’ll be sharing more scams to watch out for in this series. Stay alert, stay informed, and if you’re not sure whether something’s legit—contact us. We’re happy to talk it through.

 

Source: IRS Memorandum #202511015, Allowance of Theft Losses for Victims of Scams Under I.R.C. Section 165, 3/14/202