Since 2020, victims worldwide have lost $75 billion to pig butchering scams, lured by fake profiles on social media sites like WhatsApp and Tinder, into friendships and romances with “investors” whose goal is to gain the victim’s trust and get them to make increasingly large investments into fake crypto currency or brokerage accounts.
What’s a Pig Butchering Scam?
Pig Butchering scams are run by organized crime gangs out of “scam-factories” in Myanmar and Cambodia. They exploded in number and sophistication during Covid when the gambling revenues of these criminal organizations plummeted. The work by scammers slowly gaining their victims’ trust with repeated interactions over weeks and months, often sharing “investment tips,” with the end goal of luring victims into making investments in sophisticated, real-looking brokerage accounts and crypto-currency websites.
Sadly, many of the scammers — especially those in day-to-day contact with victims — are themselves victims. Many are lured from African and southeast Asian countries by offers of high-paying jobs, only to have their passports stolen, being imprisoned in the scam-factories, and subject to production quotas that, if not met, result in torture, organ-harvesting and sexual exploitation. The UN estimates over 220,000 trafficked people are currently imprisoned in these scam factories.
Getting Scammed Usually Triggers a Big Tax Bill, Too
I know about these scams because of their tax consequences. People liquidate retirement or investment accounts and sell real estate to get the money, generating “extraordinary” income that triggers a huge tax bill from both the IRS and California’s FTB. Trouble is that, many victims no longer have any assets with which to pay the tax bill by the time they realize they’ve been the victim of a pig butchering scam or they the sales left an enormous tax bill. Consider the circumstances for just two of my clients who were caught in this horrible scam.
One Client: Emptied Retirement Accounts, Generating Taxes
One of my clients was lured into a psuedo-romantic relationship with the “owner” of an art gallery in Europe. As their “relationship” progressed, the very successful “art dealer” shared expansion plans with my client, who eventually invested in the “second art gallery”. To come up with the money, my client emptied retirement accounts. The income from those liquidations pushed my client into a higher tax bracket, and triggered early-withdrawal penalties.
It was only a year later, after several additional “investments,” that my client realized this was a scam. By then, there were two years of extraordinary income, leading to over a half-million in taxes owed, and no more retirement savings with which to pay. Neither the IRS nor the FTB cares that my client was scammed: they received the income and therefore they owe the tax. The tax agencies are aggressively seeking payment by threatening to levy on my client’s checking account and place a lien on their primary residence.
Dealing with the Taxes: Theft Loss Deduction
The IRS allows theft losses and personal casualty losses to be deducted from income, under section 165(c) of the US Tax Code. This provision could allow my client to deduct the amount that was stolen in the scam from their income, thus effectively erasing the tax generated by liquidating the retirement account. However, the 2017 Tax Cut and Jobs Bill suspended this deduction (and many others) until 2025, disallowing theft loss deductions unless the loss is related to (1) a Federal disaster zone, or (2) a profit-seeking transaction. Clients scammed in fake romances or inheritances aren’t covered. That’s right: Congress partially funded the tax cuts of the 2017 Tax Bill by leaning on crime victims.
On the one hand, my client is fortunate because they can use the Theft Loss deduction since their scam was pitched as a business investment. On the other hand, my client is very unfortunate because the Theft Loss deduction can only be taken in the year the loss occurred, and my client didn’t realize they were investing in a scam until almost a year after liquidating their retirement accounts. So, my client is still liable for the enormous tax bill. Onto the next solutions.
Dealing with the Taxes: Bankruptcy
If a victim has almost no assets left other than retirement accounts or no more than $750,000 in equity in a primary residence (the main assets people filing chapter 7 bankruptcy may take through bankruptcy), then they can get their tax debt discharged in bankruptcy. However, they must wait until the tax debt is at least three years old for it to be dischargeable. The trouble here is that the IRS, and especially the FTB, usually are aggressively seeking payment (with liens and levies) before then. In this case, entering into an Installment Agreement with the IRS and FTB, in which regular, agreed-upon payments are made on the tax debt, will allow my client to limp along for a few years, until bankruptcy can be used to discharge the remaining tax debt generated by the scam.
Lest you believe you’d never be vulnerable to this scam, every one of my clients who’s fallen prey to a pig butchering scam is also a well-educated professional: engineers, insurance brokers, professors, realtors. Not one has been elderly or in cognitive decline. It can happen to anyone, unfortunately. And it does.
If you or someone you know has been a victim of a pig butchering scam, please call me to guide you through the tax consequences and options of one of these awful scams!
August 16, 2024