If a client becomes a victim of financial fraud, it's not always possible for the advisor to get the client's money restored. On top of that, the client might have to pay taxes on the loss.
Advisors may soon have the ability to help clients avoid some of those losses, however. The bipartisan "Tax Relief for Fraud Victims Act" (HR 9500) passed the House by an overwhelming vote of 408-17. It would restore the section 165(a) tax deduction for personal casualty losses and remove certain limits associated with it, such as a mandate that losses arise from certain disasters.
Under current law, if a victim is convinced to liquidate a 401(k) account, that wouldn't be eligible for a tax deduction, said Erin Koeppel, the CFP Board's managing director of government relations and public policy counsel.
A tax deduction for fraud losses would be restored under the bill passed by the House. It now awaits a vote by the Senate.
The section 165(a) deduction, which would be restored, was limited as of 2018 as part of the 2017 tax law.
"Most people who were victims of financial fraud, with some very narrow exceptions, were not able to be eligible to take that deduction," Koeppel said. One exception was "victims of specific kinds of investment fraud."
In addition, the bill passed by the House would waive the 10% penalty, extend the deadline for filing a refund claim, cut certain restrictions on refund amounts and permit taxpayers one year from when the loss from theft is discovered to repay early distributions.
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The CFP Board supported the bill, which was co-sponsored by Rep. Max Miller, a Republican from Ohio, and Thomas Suozzi, a Democrat from New York.
"CFP professionals — who often act as 'financial first responders' — regularly work with clients whose financial security has been disrupted by fraud and scams," the CFP Board wrote in a statement on Sept. 16. "As a result, measures that help victims recover, including avoiding paying taxes on money that was stolen from them, are an important public policy priority."
In 2025, financial scam losses for Americans were $68 billion, according to the CFP Board. That may be a low estimate, however, as many victims do not report their losses due to embarrassment.
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The Washington-based Financial Services Institute, a nonprofit organization made up of independent financial advisor members and independent financial services firms, also supported the bill.
"Victims of financial fraud should not face an additional tax burden after already suffering significant financial losses," FSI President and CEO Dale Brown said in a statement on Sept. 16.
