State Taxing Authorities Have Little Sympathy for Victims of Madoff and Other Ponzi Schemes – Installment 39

October 25, 2010Articles White Collar Defense & Compliance Blog

This is the thirty-ninth in a series of Installments on this blog that discusses issues that arose in the aftermath of the Bernard L. Madoff (“Madoff”) scandal. Various Installments of this series have discussed the impact of the Madoff scheme on individuals.

On October 17, 2010, Harold Brubaker, who has written several articles on the subject of Madoff and other Ponzi schemes in The Philadelphia Inquirer, reported that the Pennsylvania Department of Revenue has made it extraordinarily frustrating and difficult for victims of Ponzi schemes to recover state tax refunds for tax payments on income that turned out to be illusory. He quotes a tax expert as saying that New Jersey does not even have a state tax refund process for such victims.

The Brubaker article points out that this approach is totally contrary to the “relatively simple process” for refunds established by the Internal Revenue Service. He cites a number of legislative, administrative and judicial efforts in Pennsylvania that victims of Ponzi schemes have been undertaking to get state tax refunds.

It appears clear that initiatives to secure state tax refunds by victims of Madoff and other Ponzi schemers are likely to be stonewalled in the current economic, political and social climate. The reasons are many and varied:

  • States are laboring under huge deficits and are not motivated to undertake new methods to facilitate tax refund payments.
  • Legislators are struggling with election year politics and are seeking ways to raise tax dollars, not return them.
  • The general economy is still reeling from the Deep Recession with high unemployment and losses in the stock market, real estate values and retirement accounts generally; there is little sentiment for meeting the desires and needs of the relatively small population of Ponzi victims.
  • Victims of Madoff and other Ponzi schemers are viewed as “rich” people who took risks, speculated and lost; this may be a simplistic view because many victims “aggregated” funds with friends and family to amass enough to qualify for minimum investment amounts with Madoff and have now lost their entire retirement funds.
  • Some of the “victims” appear to have actually been involved with the Ponzi schemes and should be punished, not assisted financially.
  • It is now approaching two years since the Madoff scandal originally surfaced, followed by publicity about a parade of Ponzi schemes of lesser magnitude; the shock and sympathy factor for victims is becoming a memory.

Nonetheless, equitable application of the state tax laws demands the establishment of reasonable procedures for victims of Ponzi schemes to secure justifiable refunds. Otherwise the states will have successfully made themselves real “winners” of the Ponzi schemes.

[To be continued in Installment 40]