The rise of “pig butchering” crypto scams has left thousands of investors financially devastated. These sophisticated, long-con frauds build trust over months, convincing victims to invest huge sums into fake platforms before vanishing with the funds.

If you have fallen victim to one of these schemes, you know the pain is not just emotional—it is a financial catastrophe. However, there may be a way to mitigate the damage through the tax code.

Under Internal Revenue Code (IRC) § 165(c)(2) and recent IRS guidance, victims of fraudulent investment schemes may be eligible to claim a theft loss deduction. At Kugelman Law, we specialize in helping clients substantiate these claims to validly reduce their taxable income.

The Legal Basis: IRC § 165(c)(2) and IRS Guidance

Historically, the Tax Cuts and Jobs Act of 2017 suspended “personal casualty and theft losses” for individuals from 2018 through 2025. This led many to believe that all theft losses were non-deductible. This is not true.

The suspension applies to personal losses (like a stolen watch or a burglary). It does not apply to losses incurred in a “transaction entered into for profit.”

A recent IRS Chief Counsel Memorandum (No. 202511015) specifically analyzed the tax treatment of pig butchering crypto scams. The IRS concluded that because victims transferred funds with the clear intent to invest and generate a profit, these losses can be classified as investment theft losses under IRC § 165(c)(2), rather than disallowed personal losses.

Key Eligibility Requirements

To claim this deduction successfully, you must meet specific criteria:

• Proven Theft: You must show that the taking of your property was illegal under state law and done with criminal intent (e.g., fraud, larceny, or embezzlement).
• Profit Motive: You must demonstrate that your primary motive for transferring the funds was to make an investment profit. This distinguishes your case from “romance scams” where funds are sent as gifts or for personal help, which the IRS typically disallows.
• No Reasonable Prospect of Recovery: You must determine that the loss is permanent and that there is no likely path to recovering your funds from the scammers or a third party (like insurance).

How Kugelman Law Can Help

Claiming a theft loss deduction is a high-stakes tax position. It requires meticulous documentation to survive IRS scrutiny, similar to the rigor required for cryptocurrency audits. We offer specialized services to help victims report this loss correctly and defensibly.

1. Tax Return Preparation & Reporting

We can prepare your tax return to properly report the theft loss. This involves calculating your “cost basis” (the actual amount of money you put in, not the fake “gains” shown on the scam website) and filing the appropriate forms to claim the deduction against your taxable income.

2. Legal Opinion Letter

For significant losses, we highly recommend a formal Legal Opinion Letter. This document details the facts of your case, applies the relevant tax law (including the new Chief Counsel Memo), and provides a legal conclusion on your eligibility for the deduction. This serves as your primary defense should the IRS ever question the claim.

An opinion letter serves two primary purposes: (1) reasonable reliance defense against penalties if a tax agency audits the return and proposes penalties and (2) real time documentation and analysis that is ready to go in the event there is an audit.  

3. Comprehensive Package

We offer a combined service that includes both the legal opinion letter and the full preparation of your tax return for a bundled discounted fee.

Necessary Documentation

To substantiate your claim, we will need to compile a comprehensive evidence file, including:

• Complete Account Statements: Bank ledgers and crypto exchange records showing the trail of funds moving from your possession to the scammer’s wallets.
• Proof of Investment Intent: Screenshots of the fake trading platform, “account balances,” and logs of communications with the scammers where investment returns were discussed.
• Law Enforcement Reports: To prove the loss was a “theft” and not just a bad investment, you must file reports with authorities. We recommend filing with:
  • FBI via IC3: https://www.ic3.gov/
  • Secret Service Cyber Crime Task Force: https://www.secretservice.gov/
  • FTC Report Fraud: https://reportfraud.ftc.gov/
  • Your local police or sheriff’s department.

A Note on Civil Recovery

Please note that Kugelman Law focuses exclusively on the tax reporting and deduction aspect of your loss. We generally do not handle civil asset recovery (suing to get the money back) on a contingency basis.

However, we can refer you to attorneys who specialize in civil recovery for these types of fraud.

Take the Next Step

If you have suffered a loss from a pig butchering or crypto investment scam, do not let the tax implications add insult to injury. You may be able to recoup some of your losses through a lower tax bill. If you need help, our tax resolution attorneys can guide you through the process.

Contact Kugelman Law today to schedule a consultation and discuss your eligibility for a theft loss deduction.

Disclaimer: This post is for informational purposes only and does not constitute legal or tax advice. Consult a qualified professional for guidance on your specific situation.

Received IRS Letter 3585? Defending Your Personal Assets in Trust Fund Recovery Investigations

For a business owner or corporate officer, few pieces of mail are more alarming than an inquiry from the IRS regarding “unpaid Form 941 payroll tax periods.” If you have recently received IRS Letter 3585, or if a Revenue Officer has contacted you requesting a meeting, the stakes have shifted dramatically.

The IRS is no longer just looking at your business; they are looking at you.

Letter 3585 is a notification that you may be held personally liable for the Trust Fund Recovery Penalty (TFRP). This allows the government to pierce the corporate veil and seize your personal bank accounts, home, and retirement savings to satisfy a business debt.

At Kugelman Law, we specialize in this high-stakes area of tax controversy. We represent clients in trust fund recovery investigations and successfully appealed adverse determinations. If you are in the crosshairs of a TFRP investigation, you need immediate legal counsel to navigate the specific legal tests of “responsibility” and “willfulness.”

Understanding the “Trust Fund” Trap (Form 941)

To understand the danger, you must understand the debt. When an employer pays wages, they withhold Income Tax, Social Security, and Medicare from employee paychecks. These withheld amounts are referred to as “Trust Fund Taxes” because the employer holds them in trust for the U.S. government.

If a business fails to file Form 941 or fails to remit these taxes – perhaps using the funds to pay rent, vendors, or utilities to keep the business afloat – the IRS views this as theft. Unlike general business debts, which might be discharged in bankruptcy or limited to the corporation, Trust Fund taxes stick to the individuals responsible for the decision not to pay.

The Investigation Phase: The Form 4180 Interview

The IRS investigation typically begins with Letter 3585, inviting you to a conference. The Revenue Officer’s goal during this phase is to gather evidence to prove you are a “Responsible Person.” They do this primarily through the Form 4180 Interview (Report of Interview with Individual Relative to Trust Fund Recovery Penalty).

This is a trap for the unwary.

During this interview, the officer will ask seemingly innocent questions:

• “Did you have the authority to sign checks?”
• “Did you know the taxes weren’t being paid?”
• “Did you authorize payments to other creditors (like a landlord or supplier) while the taxes were due?”

Answering “yes” to these questions without proper context can seal your fate. The IRS is building a case for Willfulness – which, in tax law, doesn’t mean you had evil intent. It simply means you knew the taxes were due but paid someone else instead.

Who Should Contact Us?

You should contact Kugelman Law immediately if:

• You have received Letter 3585 or Letter 1153.
• A Revenue Officer has requested a “compliance interview” or asked you to complete Form 4180.
• You are a minority shareholder, bookkeeper, or volunteer board member being accused of tax liability.
• Your business is closed, but the IRS is still pursuing you for old payroll taxes.

How We Defend You: The Kugelman Law Approach

We intervene to prevent the IRS from steamrolling you. Our representation focuses on two distinct phases: the investigation and the appeal.

1. Representation in Trust Fund Recovery Investigations

The best time to win a TFRP case is before the penalty is assessed. We act as a buffer between you and the Revenue Officer. When we represent you during the investigation, we:

• Control the Narrative: We ensure you do not make self-incriminating statements during the interview.
• Challenge “Responsibility”: Just because you had check-signing authority doesn’t mean you were the decision-maker. We distinguish between administrative function (signing checks as directed) and financial control (deciding who gets paid).
• Redirect Liability: If you are being targeted simply because you are the “last man standing,” we help direct the IRS toward the actual decision-makers who controlled the funds.

2. Successfully Appealing Adverse Determinations

If the investigation concludes that you are liable, the IRS will issue Letter 1153 (Proposed Trust Fund Recovery Penalty). You generally have 60 days to file a formal protest.

This is a critical window. We represent clients in trust fund recovery investigations and successfully appealed adverse determinations by taking the case to the IRS Independent Office of Appeals. At Appeals, we can argue the “hazards of litigation” – showing the IRS that their evidence is too weak to stand up in federal court.

We have successfully appealed cases where:

• The client was a “check signer” but had no authority to determine which creditors were paid.
• The client was deceived by a partner or superior regarding the status of tax payments.
• The statute of limitations for assessment had expired.

Don’t Face the IRS Alone

The Trust Fund Recovery Penalty is a 100% penalty – meaning if the business owes $100,000 in trust fund taxes, the IRS can collect the full $100,000 from you personally. It is one of the most aggressive collection tools in the federal arsenal.

If you have received an inquiry involving Letter 3585 and Form 941 payroll tax periods, time is your most valuable asset. Contact Kugelman Law today to protect your future from your business’s past.