If you have been the victim of fraud, theft, robbery, or other crime, you may be able to deduct some of your losses against your income. In fact, after the Bernie Madoff scandal of late 2008, the IRS developed specific procedures to streamline and simplify procedures for deducting losses due to Ponzi-type schemes and other forms of investment fraud.
File a police report. This could be an important element in documenting your deduction, if the IRS challenges it.
File an insurance claim if you own any policies that will cover your loss. Few policies cover fraud, but many renter, homeowner and auto policies cover theft.
Download a copy of IRS Form 4684 - Casualties and Thefts from the link in Resources.
Figure your loss in Section B of IRS Form 4684. You deduct fraud losses in the same manner as theft losses.
Fill out Appendix A of Internal Revenue Bulletin 2009-14, which you can download from the link in Resources, and write "Revenue Procedure 2009-20" across the top of IRS Form 4684.
Return Form 4684, along with any supporting documentation with your tax return to the IRS.
Always file an insurance claim to recover the value of any property covered by insurance, Otherwise, the IRS will not permit you to deduct a loss. Any losses from fraud or theft not covered by insurance are still deductible, to the extent it exceeds $500 per event.
You cannot deduct money or property you simply misplaced, nor can you deduct property breakage under normal conditions.