The 2017 GOP tax scam is paying for itself—by taxing scammed seniors

It’s no secret that the proliferation of scams targeting elderly Americans has increased dramatically with the expansive spread of information technology. Older Americans are particularly vulnerable to such scams, a disturbing reality that was made clear to me shortly before my father passed away. My parents, both in their 80s, were being inundated by scam phone calls and mailings, including the infamous grandparent scam, literally on a daily basis. Because they, like many older Americans, grew up in a more trusting time, they were often just at the point of falling for these scammers on multiple occasions before I intervened. 

Few things in life are as viscerally humiliating as realizing you’ve been ripped off, but for older Americans, the shame and embarrassment is often aggravated by their inability to find help or recourse, particularly in a society now immersed in digital technologies they might not fully understand. Even worse is when the scam exacts a devastating financial blow that eviscerates the limited resources people may have saved to cover the cost of living into their advanced years.  

But these concerns didn’t seem to matter to Republicans in 2017, when they embarked on their mission to massively cut the taxes of their wealthiest benefactors. Instead, they found a clever new way of compounding the pain caused by this new epidemic of fraud: by forcing fraud victims to pay taxes on financial losses they’d suffered as a result of these scams, Republicans discovered they could provide even bigger tax cuts to their political patrons. All they needed to do was make a minor tweak to the tax code. So that’s exactly what they did.

As they drafted their massive corporate tax giveaway in 2017, ultimately passing it in the dead of night with exactly zero Democratic support, congressional Republicans tried to devise the most clever ways to skew the current tax code in ways that rewarded their wealthiest political donors, those corporations and individuals who had poured stupendous amounts of untraceable dark money into byzantine Republican PACs, all of it intended to achieve the overarching goal of eliminating their obligation to pay taxes. 

But those Republicans only had a finite sum of money to work with, and the tax cuts their donors demanded were a lot more than the nation could possibly afford. As Michael Laris reported in December for the Washington Post, just cutting the corporate tax rate from 35% to a measly 21% would cost $1.35 trillion. They simply needed to squeeze more money out of the rest of Americans in order to pay for these massive cuts for the rich.

So Republicans got creative. As Laris observes in his follow-up article, published last week in the Post, first they capped the deductions for state and local taxes, deductions that millions of ordinary taxpayers—mostly from “progressive” states—had relied on for decades. But that wasn’t enough. As Laris notes, they also “temporarily” limited deductions for people who had lost their property due to floods, fires and earthquakes. But that wasn’t enough, either. 

Then someone had a flash of insight: What if we just eliminate the previous, established tax deduction for those victimized by frauds or scams? Those people—mostly old folks—were going to feel so foolish at being victimized, they’d never complain! Besides, older, helpless fraud victims don’t have any lobby representing them, no one to advocate on their behalf. Why not just change the tax code so they have to pay full taxes on their losses, even if those losses were incurred because of con men and scammers? It was a solution perfectly befitted to a party slavishly beholden to a serial con man and fraudster like Donald Trump. 

As a result, ever since the 2017 Republican tax abomination went into effect, with Trump’s blessing and signature, many Americans victimized by fraud schemes are now burdened with the responsibility of paying taxes on money that has been stolen from them. 

Pennsylvania Democrat Bob Casey chairs the Senate’s Special Committee on Aging. This month, the committee released a report detailing some of the real-world consequences of the Republicans’ efforts.  

From the report’s Executive Summary:

For a century, taxpayers who experienced theft could claim a tax deduction to offset their losses: the casualty and theft loss deduction. In 2017, Republicans in Congress passed the Tax Cuts and Jobs Act of 2017 (TCJA), which effectively repealed this provision. As a result, victims of fraud and scams can no longer deduct those losses and are often obligated to pay taxes on money that has been stolen. At a time when fraud, scams, and related losses are steadily increasing, with older adults losing the most money, this change has been devastating for many Americans. In some cases, older adults are facing huge tax bills on top of losing all their assets, leading many in this situation to feel that they have been victimized twice.

Because the theft deduction has historically been limited to losses that exceed 10% of a taxpayer’s adjusted gross income, it was intended to apply in circumstances where the victim of fraud incurred significant losses. Thus, it was well-calibrated to protect vulnerable seniors who often live on a small, fixed income but may have more funds put away for their retirements. But with the near-total repeal of the theft deduction, taxpayers are now compelled to list many of these losses as regular income, thus subject to tax, even though they obviously could not have made use of money stolen from them. As the report notes, this distortion of their regular income can also impact poorer people’s eligibility for benefits such as SNAP or Medicaid. And while Republicans left standing some minor exceptions to their new prohibition, those exceptions favor businesses, not individuals.

As Laris’ Post article notes, the Senate committee report highlights interviews with retiree victims of scams who have nonetheless been forced to pay taxes on their losses, leaving them financially and emotionally devastated. One individual named “Larry” (last names are not emphasized for privacy reasons) was goaded into withdrawing over $750,000 from his retirement account by someone impersonating a Social Security Administration representative. Told his Social Security number was “compromised,” he was talked into purchasing cryptocurrency, which naturally disappeared. Because he had taken the money out of his IRA account, it was automatically subject to taxes, in the amount of $220,000. He was forced to rely on his brother to pay off the tax bill, and now says he has virtually nothing for his retirement and nothing to leave to his children.  

The committee’s report also highlights the story of “Kate,” a retired, widowed secretary taken in by a romance scam. The scammer, posing as a United Nations surgeon stationed in Iraq, bilked her out of nearly $40,000 after establishing an online relationship that included marriage proposals and phony communications from his non-existent children. She had withdrawn the money from a pre-tax retirement account and sent it to the scammer prior to discovering the fraud. Ultimately, she was forced to pay $5,000 in federal taxes on top of her losses. That drained her resources to the point where she could not afford repairs to her HVAC system, so she purchased a portable unit. That unit ultimately failed, leading to a fire that burned down her home.

There is no level that these scammers won’t stoop to. The committee report describes a man who was told by scammers posing as Department of Homeland Security agents that his citizenship was at risk because his identity had allegedly been stolen. He was conned into liquidating his pension fund, making a dozen wire transfers to safeguard his assets. When he was finally informed that he’d been a target of fraud, he’d lost nearly his entire life savings, and then faced a tax bill on his withdrawals amounting to nearly a million dollars. Another retiree couple from California were told that their bank accounts had been compromised and needed to be moved to “special” accounts. After losing $900,000 to the scam, they were hit with a $240,000 tax bill. In the meantime, the husband was diagnosed with late-stage cancer, compounding their financial stress. 

One might argue that the victims of these scams should have been less gullible. That may be a satisfying conceit, but the stories in the report show a level of sophistication that can deceive even the most highly educated people, such as the former White House scientist who was swindled out of $655,000 from her retirement fund by an intricate tech support scam and taxed on her losses by the IRS, which saw those losses as a taxable distribution. The takeaway from the report is that virtually anyone can be scammed if the right circumstances are exploited.

Nor is it fair to blame the IRS for any of this. It is simply following the law as Republicans crafted it: to pay for the huge tax breaks they elected to bestow on their rich corporate donors. And, as Laris reports, despite the accumulation of horror stories happening to individual taxpayers—Democrats and Republicans alike—over 100 House Republicans sponsored legislation last year that would make these specific changes permanent.

Senate Democrats have responded with a bill that restores the theft deduction to its pre-2017 status. Since House Republicans have no desire to change the tax law as it currently stands, the fate of those bills will depend on which party controls Congress and the White House after the 2024 election. For Americans worried about protecting their assets and savings, that decision should not be difficult.  Campaign Action