Woman Drains 401(k) in $600K LinkedIn Scam — Then Faces $225K Tax Bill on Money She Lost

Lori Flowers thought she was helping a close friend, but she lost $600,000 to an online scam and was left with a $225,000 tax bill linked to retirement withdrawals.

Flowers, 58, fell victim to a pig-butchering scam after a man contacted her on LinkedIn, claiming to be from Brussels. Over months, he gained her trust and persuaded her to invest in a fake US business. The money was gone, and the tax bill followed when her retirement withdrawal was taxed as income.

A Friendship That Turned Into a $600,000 Loss

The man initially appeared to be building a genuine friendship with Flowers, who lives in North Carolina. They exchanged messages on LinkedIn before moving to email and eventually speaking by telephone. About four months into the relationship, he told Flowers he had secured a major US business contract but needed additional capital after investors backed out.

Flowers eventually withdrew $400,000 from her 401(k) and sent it to him. When her bank manager asked whether she knew the recipient, she said she was offended by the question because she believed she knew him well. A month later, the man claimed he needed another $200,000. Flowers took out two personal loans to provide the additional money.

By June, she was facing about $4,000 a month in loan payments. Around the same time, she realised she had been deceived. Flowers eventually filed for Chapter 13 bankruptcy. Her monthly payment rose to $5,690, with much of it going towards the tax debt.

Why the Scam Led to a Tax Bill

The tax problem stems from federal rules governing personal theft losses. The Tax Cuts and Jobs Act of 2017 restricted the ability to deduct personal casualty and theft losses, generally limiting the deduction to losses connected to federally declared disasters. The restriction was subsequently extended under federal tax law. As a result, victims of certain private fraud schemes can face a tax liability even when money withdrawn from a retirement account was ultimately transferred to a scammer.

USA TODAY reported that Flowers learned she owed about $225,000 in taxes and penalties connected to the retirement withdrawal. Clark Flynt-Barr, AARP's government affairs director for financial security, has also described the additional burden faced by scam victims who lose money and then face tax liabilities. The issue has prompted lawmakers to consider changing the tax treatment of fraud-related losses.

House Passes Tax Relief Bill

The Tax Relief for Fraud Victims Act, H.R. 9500, passed the House on 15 September by a vote of 408-17. The bill was then sent to the Senate. The legislation would repeal the limitation on personal casualty-loss deductions and provide additional relief for certain theft losses involving fraud, deceit or misrepresentation.

It also contains provisions concerning retirement-plan distributions connected to qualifying fraud-related theft losses. The bill would allow certain victims to seek refunds and would apply retroactively to qualifying losses incurred after 31 December 2020. If enacted and if Flowers meets the eligibility requirements, the legislation could reduce or eliminate the tax liability associated with her retirement withdrawal. It would not recover the money she sent to the scammer.

Another Bill Targets Scammers

Congress is also considering legislation focused on investigating financial fraud. The GUARD Act, H.R. 2978, sponsored by Rep. Zach Nunn of Iowa and other lawmakers, would allow state, local, and tribal law enforcement agencies to use eligible federal grant funding to investigate financial fraud, elder financial fraud, and pig-butchering schemes.

The House passed the measure on 15 September by a vote of 414-7. It has since been sent to the Senate. The legislation would also clarify federal assistance for state, local, and tribal authorities using blockchain and related technology to trace stolen funds.

The two bills address separate parts of the fraud problem. H.R. 9500 concerns the tax treatment of qualifying fraud-related losses, while the GUARD Act concerns law enforcement resources for investigating financial scams. For Flowers, the tax legislation could determine whether the financial consequences of the scam extend beyond the $600,000 she lost.