New House bill hopes to waive the IRS 10% early withdrawal penalty and restore tax deductions for scam victims

Aditi Ganguly

Fri, July 31, 2026 at 4:10 PM GMT+3 8 min read

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Fraud victims are dealt multiple financial blows if they take money out of their retirement account before 59½ years of age. What's worse, many financial losses resulting from scams aren't deductible on your tax return.

A new bill introduced by the House Ways and Means Committee (1) would change that by allowing for more instances where scam victims can claim personal losses from theft on their taxes.

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Under current U.S. law, you can only potentially deduct personal losses incurred from a weather event or a scam if it's tied to an investment opportunity. That's because investment scams are deemed to be motivated by profit (2), so it works similarly to claiming losses from the sale of underperforming stocks (3).

However, no such exemptions exist for victims of romance or imposter scams. If a victim of a romance scam drains their 401(k) and sends it to the cybercriminal under false pretenses, it's not considered a for-profit move (4).

Not only would this individual need to pay income taxes on the distribution and replace those retirement funds over time, they would also be subjected to the IRS' 10% early withdrawal penalty (5).

Inside the Tax Relief for Fraud Victims Act

Prior to 2018, taxpayers could claim itemized deductions for personal casualty losses — such as weather events, car accidents and vandalism — and theft losses like some scams. But President Donald Trump's Tax Cuts and Jobs Act (6) limited such losses to those resulting from a federally declared disaster. The One Big Beautiful Bill Act, passed in 2025, made those changes permanent, while also adding state-declared disasters as an exemption, according to CNBC (7).

The proposed measure in the House, the "Tax Relief for Fraud Victims Act (8)," would eliminate those limitations for both personal casualty and theft losses. Scam victims would be able to deduct their loss to the extent it exceeds 10% of their adjusted gross income — and for more than just those tied to investment scams.

"It reinstates the deduction to provide relief to victims of fraud so they can deduct the amount stolen from them, thereby mitigating the majority of the tax consequences," Clark Flynt-Barr, AARP's government affairs director for financial security, told CNBC (7).

The Tax Relief for Fraud and Victims Act would also give victims the flexibility to claim losses in the year that they were incurred or were discovered. Victims would have one year to file amended tax returns (9) from the date of discovery.

And, if applicable, the 10% IRS early withdrawal tax penalty would also be waived regardless of the purpose for which victims withdrew the money.

Scamming activity is up and business is good

In 2025, consumers reported $16 billion in fraud losses, according to the Federal Trade Commission. That is the highest fraud-loss total ever on record (10) and up about 25% from 2024, the agency said in June.

Investment scams were far and away the most costly for consumers, totalling $7.9 billion in losses. On the other hand, imposter scams were the most prominent. About one-third of all fraud reports received by the FTC were tied to it. These scams involve cybercriminals posing as authority figures like the IRS or financial institutions to con victims.

"Some of the costliest impersonation scams start with a fake security alert, often from a bank," the FTC said in a release (10). "People are convinced to move money to 'protect' it, with their losses often limited only by their available funds."

Swindlers can contact their victims via phone, text or email, but social media has proven to be incredibly popular. Social media scams accounted for $2.1 billion of all consumer losses (11) in 2025, and are popular places for investment, shopping and romance scams to originate.

As these scams become more sophisticated — often powered by AI and impersonation technology — relying on instinct alone simply isn't enough.

Adding another layer of protection can help catch warning signs you might otherwise miss.

Get added protection

Platforms like Aura offer a way to manage device and identity protection in one place.

Aura's AI-powered platform is designed to help protect your household from identity theft, phishing attempts, scams and malware across multiple connected devices. It can even alert you to potential fraud up to 650 times faster than traditional monitoring tools.

Aura also monitors spending activity for unusual transactions and can notify you when something looks out of the ordinary. If identity theft does occur, eligible users may qualify for up to $1 million in coverage for certain losses and related fees.

Getting started is quick and easy. Plus, you could save up to 68% if you sign up today — and Aura even offers a 60-day money-back guarantee if you're not satisfied.

What to do if you've been scammed

If you've been scammed, begin with reporting the incident to the FTC (12). Cyber-related crimes should also be reported to the FBI's Internet Crime Complaint Center (13). You're unlikely to hear back from these agencies, but your reports will be used to inform the public of fraud trends and help authorities catch criminals (14).

Depending on the level of the scam (15), you will need to contact your financial institution to make it aware of the incident. Be sure to also close any impacted accounts and change your login passwords.

Finally, if your personal identifiable information, such as your name and Social Security Number, were stolen, it might be a good idea to freeze your credit (16) with the three major credit bureaus: Equifax, Experian and TransUnion. This prevents bad actors from opening new credit accounts in your name.

Talk to a fraud specialist for free

If you believe you've been targeted by a scam, acting quickly can make a major difference. But recovering from fraud isn't always straightforward, and many victims aren't sure what steps to take next.

That's where expert guidance can help.

Organizations like AARP offer free support through their Fraud Watch Network Helpline, where trained specialists help victims understand their options, report scams and reduce the chances of becoming a repeat target. The organization also hosts educational webinars and support groups where consumers can hear directly from fraud experts.

The benefits don't stop there. AARP members can also access resources that can help you make the most of Social Security, Medicare and other government benefits while taking advantage of discounts on healthcare, insurance, travel and other everyday purchases.

Adjust your financial plan

Financial fraud doesn't just empty your bank account — it can derail years of careful retirement planning. While the Tax Relief for Fraud Victims Act cleared the House Ways and Means Committee on July 1 with unanimous support, it still must get House and Senate approval to become law.

Until then, victims who lose money from retirement accounts like a 401(k) or IRA may face a painful double whammy — losing years of retirement savings while still owing taxes on the withdrawn funds.

A financial advisor can help you look beyond the immediate loss, rebalance your finances and build a realistic plan for getting back on track.

You can connect with a vetted FINRA/SEC-registered advisor near you for free through Advisor.com.

Here's how it works: Simply enter a few details about your finances and goals, and Advisor.com will comb through its roster and connect you with a qualified expert best-suited for your needs based on your unique financial goals and preferences.

Even better, Advisor.com lets you set up a free initial consultation with no obligation to hire to see if your match is the right fit for you before making a decision.

— With files from Danni Santana