Like many Americans, I don’t read Senate reports on a regular basis, but one I read recently was an exception. Written by a majority of the staff of the Select Committee on Aging, it contained some of the most underhanded ways retirees have been defrauded of their life savings.
The report says victims of these scams are facing huge back taxes after their bank or brokerage accounts are emptied. The back taxes stem from the Tax Cuts and Jobs Act (TCJA), a 2017 law that stripped scam victims of the ability to deduct losses from federal income taxes.
Fraud
Scams come in all shapes and sizes and seem designed to deceive as many people as possible. Here are two examples of the scams mentioned in the Senate report.
Larry, a retiree in his 70s
After being contacted by an individual claiming to be a Social Security Administration (SSA) official, Larry was tricked into withdrawing money from his IRA, 401(k) and savings accounts to purchase cryptocurrency.
Larry’s initial loss was $765,000, but because he cannot deduct the loss on his federal income tax return, he must pay an additional $220,000 in federal taxes, bringing his total loss to nearly $1 million.
Richie, a retiree in his 60s
Like Larry and countless others, Richie was contacted by someone pretending to be someone else. Richie’s financial nightmare began when his laptop froze and a pop-up prompted him to call a number.
The person on the other end of the line told Richie that he worked for Microsoft and that Richie’s social security number had been compromised. He said that two fraudulent withdrawals had already been made from Richie’s bank account.
Richie was then connected with someone claiming to be a Social Security administrator. This scammer tricked Richie into transferring money from his bank accounts to “protect his assets.” Within a month, Richie made 11 transfers totaling over $567,000. He also had to pay over $44,000 in back federal and state taxes on the stolen money.
Ultimately, it’s about exploiting fears
Scammers use a variety of schemes. If one doesn’t work, they move on to the next. And it’s not just novices or retirees who fall for these scams. People from all walks of life have fallen victim.
The Senate report also tells the story of Sally and Bill, retirees in their 70s who fell for a scam by someone posing as a bank representative. According to Sally, the scammer was very convincing. The ability to be believable while offering a “solution” lures a victim close enough to be robbed.
Scammers take advantage of their victim’s emotional reaction to the idea of losing their entire life savings. This emotion clouds their critical thinking and causes them to take steps they would never normally take without further investigation.
Which taxes come into play
When a person withdraws money from a taxable or tax-free retirement account, such as an IRA or 401(k), taxes must be paid on the withdrawal. The amount due is based on the person’s total taxable income for the year. Since the TCJA took effect in 2017, it no longer matters why the funds were withdrawn, and there are no protections for those who have been defrauded of their money.
In addition, victims who are younger than 59 1/2 years old on the withdrawal date may be subject to a 10% penalty if they withdraw their account early.
Protect yourself
Here are three practical tips to protect your hard-earned money.
1. Don’t react to scaremongering
Fraudsters know that many retirees worry about whether they have enough money for retirement. Be skeptical if someone contacts you and tells you that one of your accounts has been compromised or offers you an investment opportunity that sounds too good to be true.
If someone pressures you to “act quickly,” you should immediately be suspicious of that person’s motivation. They don’t want you to have time to critically consider your options.
2. Do not acknowledge attempts to contact you
Another warning sign is unwanted calls, texts or emails from someone you don’t know. Many of those who have been scammed out of their life savings have been contacted by complete strangers, who ultimately allowed these people to insinuate themselves into their lives.
If you get a call from a number you don’t recognize, don’t answer it. If you get a text from an unknown number, report it as junk. And if you get an email from someone you don’t know (even if it claims to be from a U.S. government agency), delete it. If there was a problem, the government wouldn’t contact you by phone, text, or email, it would contact you by mail.
3. Understand how ID spoofing works
Let’s say someone calls you and says they’re from your bank. You only answered the call because the caller ID looked like it was from your financial institution.
Unfortunately, scammers can make it look like they’re calling from anywhere using a technique called “ID spoofing.” They might be sitting in a basement in Peoria, Illinois, pretending to be a bank teller, or in a boiler room pretending to be a tech support representative at a brokerage firm.
If someone claims to be from your bank or broker, get their name and hang up. Then call the actual number for your bank or brokerage firm (not the number the caller gave you) and ask to speak to a manager. Explain your situation. Chances are you will be advised to ignore any further messages from the caller.
For retirees who have recently fallen victim to a scam, having to pay taxes on the money they lost is a double blow. At this point, the best thing you can do is outsmart the scammers by not responding.
