House panel advances tax relief bill for fraud victims

Scam victims can lose their savings and still face a tax bill on money they no longer have. A bipartisan bill moving through Congress would change that by restoring a deduction for many fraud losses and easing penalties when victims were pushed into tapping retirement accounts.

The proposal, called the Tax Relief for Fraud Victims Act, would remove current limits that generally block deductions for personal theft losses unless they are tied to a declared disaster. The House Ways and Means Committee approved the measure, H.R. 9500, on July 1 in a 39-0 vote, according to Congress.gov.

The bill has not become law. It is unclear when, or whether, the full House will take it up.

Why scam victims can face taxes after a theft

The tax problem often starts when stolen money came from an account that had not yet been taxed, such as a traditional 401(k) or individual retirement account. Withdrawals from those tax-deferred accounts are usually treated as taxable income, even if the money was handed to a fraudster.

If the victim is under 59½, the withdrawal can also trigger a 10% early distribution penalty. The proposed bill would waive that penalty when it applies to fraud-related withdrawals.

Another issue is the loss deduction. Before 2018, taxpayers generally could itemize personal casualty and theft losses, subject to rules that included a threshold based on income. The Tax Cuts and Jobs Act of 2017 temporarily narrowed that deduction to losses connected to federally declared disasters. President Donald Trump’s law enacted last year made that restriction permanent and added state-declared disasters, according to the tax-law changes described by CNBC.

Investment fraud is treated differently in some cases. An IRS memorandum issued in March 2025 said investment theft losses may be deductible because the taxpayer had a profit motive. Tax experts told CNBC that victims of other scams, including impersonator and romance scams, generally have not been able to deduct those losses under current rules.

Matthew Roberts, a tax attorney and partner at Meadows Collier in Dallas, told CNBC that blocking the deduction can be harsh for victims. “It’s very punitive not being able to claim a theft loss deduction,” Roberts said.

Fraud losses keep rising

The push comes as reported fraud losses climb. Consumers reported $15.9 billion in fraud losses to the Federal Trade Commission in 2025, the agency said. That was the highest total on record, up about 27% from $12.5 billion in 2024. Since 2020, reported losses have risen nearly 430%, according to the FTC.

Imposter scams were the most reported fraud category last year, based on FTC data. Roughly 1 million people filed imposter scam reports. The FTC said 80% reported no financial loss, while the remaining 20% lost a combined $3.5 billion.

Investment scams produced the largest reported dollar losses, at more than $7.9 billion, according to the FTC.

The FTC has also pointed to a rise in people reporting losses of $100,000 or more, especially among adults 60 and older. Clark Flynt-Barr, AARP’s government affairs director for financial security, told CNBC that large losses in that group often happen because retirement accounts are cashed out.

Among adults 60 and older, losses of at least six figures totaled $1.6 billion in 2024, or 68% of the $2.4 billion that age group reported losing, according to the FTC’s 2025 annual report to Congress.

What the bill would change

The Tax Relief for Fraud Victims Act would end the disaster-related limit for personal casualty and theft losses. Flynt-Barr told CNBC the bill would let fraud victims deduct stolen amounts and reduce many of the tax consequences that follow a scam.

The measure would also give victims more timing flexibility. Under current law, taxpayers who qualify for a theft-loss deduction generally claim it in the year the fraud is discovered, Roberts told CNBC. The bill would allow victims to deduct the loss for the year it happened.

That distinction can matter for retirees. Roberts told CNBC that some retired taxpayers may have little taxable income in later years, especially if the fraud drained their retirement funds.

The bill would also make it easier for victims to replace money withdrawn from retirement accounts, according to experts cited by CNBC. Current contribution limits and account rules can make rebuilding those balances difficult after a fraud-driven withdrawal.

This story draws on original reporting from CNBC.