Owe The IRS After A Scam? Here’s What You Can Do About It

Scams are unfortunately common, and when they involve taxes, the consequences can be severe. Many people find themselves in trouble with the IRS after falling victim to identity theft, romance scams, Employee Retention Credit scams, tax fraud, fake investment platforms, or crypto-related fraud.

Dealing with the IRS after a scam can feel unfair and overwhelming. You may have lost money, discovered a fraudulent return, received a tax bill you do not understand, or learned that a withdrawal from a retirement account created taxable income even though the money was stolen.

The good news is that there may be ways to correct the record, reduce the damage, and resolve the IRS issue. The right strategy depends on the type of scam, the tax year involved, whether a false return was filed, whether you received taxable income, and whether the loss qualifies for tax treatment under current law.

First, Identify What Kind Of Scam Created The IRS Problem

Not every scam creates the same tax problem. Before you respond to the IRS, identify which category best describes your situation.

What Happens When You Owe The IRS After A Scam?

The IRS has processes for identity theft, fraudulent returns, amended returns, audit responses, and tax debt resolution. But the IRS generally will not know the full story unless you provide the right documentation.

If a scammer filed a fraudulent return in your name, the IRS may need proof that you were the victim of identity theft. If you claimed a credit because of bad promoter advice, the IRS may still ask you to prove eligibility. If you lost money in an investment scam, the IRS may require documentation showing the loss, the year of discovery, the lack of reasonable recovery, and whether the transaction was entered into for profit.

That is why the safest approach is not just to say, “I was scammed.” The better approach is to organize the facts, identify the tax issue, and send the IRS the specific forms, records, and explanation needed for your situation.

1. Report Tax Identity Theft To The IRS

If the scam involved identity theft, report it to the IRS as quickly as possible.

• IRS Identity Theft Hotline: 1-800-908-4490
• Identity Theft Affidavit: Complete IRS Form 14039 if the IRS instructs you to do so or if your tax account has been affected by identity theft.
• IRS tax scam information: Review the IRS’s current tax scams guidance.

Supporting documentation can help. Keep copies of police reports, FTC reports, scam emails, text messages, fake account screenshots, bank records, cryptocurrency transaction records, and any IRS notices you received.

Once the IRS processes identity theft information, it may flag your account to help prevent future fraudulent filings or account misuse.

2. Contact Your State Tax Authority If State Taxes Were Affected

If the scam involved state tax filings, state withholding, state credits, or a fraudulent return filed with your state, contact your state tax agency too. Many states have fraud or identity theft units that handle tax-related scams.

This is especially important if you received a state tax notice, refund denial, collection notice, or request for information connected to a return you did not file.

3. Review Your Tax Returns And IRS Records

After reporting the scam, review the affected tax years carefully. You may need to compare:

• The return you actually filed
• IRS transcripts
• Forms W-2, 1099, 1099-R, 1099-B, or 1099-K
• Any fraudulent or incorrect return activity
• Any credits or deductions claimed because of scammer or promoter advice
• Any retirement distributions, investment sales, or crypto transfers connected to the scam

If your return is wrong because of the scam, you may need to file IRS Form 1040-X to amend the return. But do not file an amended return blindly. In some cases, the better first step is to respond to the IRS notice or identity theft process. In other cases, an amended return is necessary to correct income, deductions, credits, or filing status.

4. Determine Whether A Theft-Loss Deduction May Apply

Some scam victims may be able to claim a theft-loss deduction. Others may not. This is where the tax analysis becomes very fact-specific.

In March 2025, the IRS Office of Chief Counsel released Chief Counsel Advice Memorandum 202511015, addressing theft-loss deductions for scam victims under Internal Revenue Code Section 165. The National Taxpayer Advocate also published a summary explaining that the memo clarifies when certain scam victims may qualify for a theft-loss deduction and where current law still leaves gaps.

Under the IRS guidance, a theft-loss deduction may be available when:

• The loss resulted from criminal conduct classified as theft under applicable state law
• The taxpayer has no reasonable prospect of recovering the stolen funds
• The loss arose from a transaction entered into for profit

This may help some victims of investment scams, crypto scams, fake trading platforms, compromised investment accounts, or other schemes where money was moved or invested with a profit motive.

However, the Tax Cuts and Jobs Act restricted personal casualty and theft-loss deductions for tax years 2018 through 2025 unless the loss is connected to a federally declared disaster. As a result, victims of purely personal scams, such as many romance scams or fake kidnapping schemes, may not qualify for the deduction under current law if there was no profit motive.

If a theft-loss deduction applies, it is generally reported on IRS Form 4684, Casualties and Thefts. The deduction must be supported with detailed documentation, such as transaction records, police reports, account statements, communications with the scammer, and evidence that there is no reasonable prospect of recovery.

5. Report The Scam To Law Enforcement And Other Agencies

Reporting the scam can help document your case and may be important if you later need to prove the loss to the IRS.

Depending on the scam, consider reporting it to:

• The IRS, if the scam affected your tax account or tax return
• Your state tax agency, if state taxes were affected
• The FBI’s Internet Crime Complaint Center at IC3.gov
• Your local police department
• Your bank, brokerage, credit card company, or crypto platform
• The Federal Trade Commission at ReportFraud.ftc.gov

Keep copies of every report, confirmation number, and written response. The IRS may need to see that you took reasonable steps to report the theft and pursue recovery.

6. Protect Your Information After The Scam

Once the immediate IRS issue is being addressed, protect yourself from future fraud.

• Shred sensitive documents containing your Social Security number, bank account information, or tax records.
• Use unique, complex passwords for financial, email, and tax accounts.
• Enable multi-factor authentication where available.
• Monitor your credit reports for unauthorized accounts.
• Consider an IRS Identity Protection PIN if you are eligible.
• Report suspicious messages, calls, or mail immediately.

What If You Still Owe The IRS And Cannot Pay?

Even after you report the scam, correct your returns, or evaluate a theft-loss deduction, you may still have a tax balance. That can happen if the IRS balance is valid, if the loss is not deductible, if the deduction does not fully offset the income, or if penalties and interest have already accrued.

If you cannot pay in full, options may include:

• Installment agreement: A monthly payment plan with the IRS.
• Partial pay installment agreement: A payment plan that may not fully pay the debt before the collection period expires.
• Currently Not Collectible status: A temporary collection hold when you cannot afford to pay basic living expenses and the IRS at the same time.
• Offer in Compromise: A possible settlement for less than the full balance if you qualify based on IRS financial standards.
• Penalty abatement: A request to remove or reduce certain penalties when the facts support relief.

These options are not automatic. The IRS will usually review income, expenses, assets, equity, and documentation before granting collection relief.

When To Talk To A Tax Attorney

You should consider speaking with a tax attorney if:

• The IRS says you owe tax because of a scam
• You received an IRS audit letter, CP2000 notice, balance due notice, or collection notice
• The scam involved an IRA, 401(k), brokerage account, cryptocurrency, or fake investment platform
• You are not sure whether Form 4684 applies
• You need to amend a return but are worried about making the problem worse
• You are facing penalties, interest, liens, levies, or wage garnishment
• You cannot afford to pay the IRS balance

Attorney Sammy Kim helps individuals and businesses resolve IRS and state tax problems, including tax debt, audits, collection issues, penalty problems, and complex tax matters caused by scams or bad advice. Sammy holds an LLM in Taxation from Georgetown University Law Center, is admitted to the U.S. Tax Court, and represents clients from Fairfax, Virginia, Northern Virginia, Washington, DC, and nationwide in federal IRS matters.

Frequently Asked Questions About Owing Taxes Due To A Scam

How do I know if I have been the victim of a tax-related scam?

You may discover a tax-related scam when the IRS says more than one return was filed in your name, your refund is missing, your IRS transcript shows income you do not recognize, you receive a balance due notice for a return you did not file, or you find accounts or transactions you did not authorize.

Can I claim a tax deduction for money lost in a scam?

Maybe. For tax years 2018 through 2025, many personal theft losses are not deductible unless tied to a federally declared disaster. But some investment or profit-motive scams may qualify as theft losses under IRC Section 165. The analysis depends on the facts, documentation, applicable state theft law, and whether there is a reasonable prospect of recovery.

What is a pig butchering scam for tax purposes?

A pig butchering scam is a long-form fraud where scammers build trust and then convince the victim to put money into fake crypto, stock, or investment platforms. For tax purposes, the key question is whether the loss arose from a transaction entered into for profit and whether it satisfies the requirements for a theft-loss deduction.

Are romance scam losses tax deductible?

Many romance scam losses are treated as personal losses. Under current federal rules for tax years 2018 through 2025, personal casualty and theft losses generally are not deductible unless connected to a federally declared disaster. If the scam had an investment component, the facts should be reviewed carefully.

What form do I use for identity theft with the IRS?

IRS Form 14039 is the Identity Theft Affidavit. It is used when your tax account has been affected by identity theft or when the IRS instructs you to submit it.

What form do I use for a theft-loss deduction?

IRS Form 4684 is used for casualties and thefts. Scam victims should not assume they qualify automatically. The deduction depends on the type of scam, profit motive, documentation, year of discovery, and recovery prospects.

Will the IRS charge interest on tax debt caused by a scam?

Interest may continue to accrue on unpaid tax while the issue is being resolved. If the tax balance is corrected, reduced, or removed, the related interest may change too. Because timing matters, it is important to respond quickly.

What if I cannot afford to pay the IRS after the scam?

You may qualify for an installment agreement, partial pay installment agreement, currently not collectible status, offer in compromise, or penalty abatement. The right option depends on your income, expenses, assets, and the reason the balance exists.

Get Help With IRS Tax Debt After A Scam

If you were scammed and now owe the IRS, do not wait for the problem to get worse. The IRS may need documentation, corrected returns, a theft-loss analysis, or a collection resolution strategy.

Talk to a tax expert now. Book a consultation at vataxattorney.com or call (703) 202-1005.