The sting of embezzlement is bad enough, but when you can’t get justice because neither you nor the police are successful at proving guilt – even when you know who did it – frustration can multiply. Yet, justice may still be served when you involve an unlikely ally: the IRS.
Income is income
It’s a pretty safe bet that the embezzler failed to report his or her extra “income” to Uncle Sam. And the IRS certainly will be interested in prosecuting the individual for tax evasion — regardless of whether a fraud prosecution can be mounted. Federal income tax authorities aren’t as concerned with the source of people’s money as with whether they paid income tax on it.
You’ll enjoy another benefit by getting the IRS involved: If caught, the thief will be punished and your company may be able to deduct the embezzled amount. Note, however, that you’ll need to report the theft to the police if you want to establish that you were a victim. Losses due to theft are deductible in the year in which they’re discovered, regardless of when they occurred.
The strongest substantiation for a theft deduction is an employee’s criminal conviction. But if your company’s embezzler hasn’t been convicted, you may be able to use reasonable inferences that point to theft. If, for example, you discover the theft around the time your suspect employee buys a luxury car you know he or she can’t afford, there may be a reasonable inference that a crime has been committed.
The support you need
If you can convince tax authorities that your money was stolen and you have little chance of recovering any of it, you can deduct the full amount. But keep in mind that, if you underestimate the amount you may recover, the IRS will treat anything you actually receive over that amount as taxable income.
Even when you are the clear victim, it’s important to involve a professional before contacting the IRS about suspected fraud and the resulting income tax implications. For more information or for assistance enlisting the government’s help with a fraud matter, call us at 949-860-9902 or click here to contact us.