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Tax Plan Is Meant to Help Indirect Madoff Investors

12/07/09 - Some less-affluent victims of Bernard L. Madoff’s Ponzi scheme could receive extra help from a change in the tax code, under a proposal submitted Monday by Senator Charles E. Schumer, Democrat of New York.

The plan would make indirect investors — those who invested through so-called feeder funds — eligible for tax breaks for theft and fraud losses that are already available to direct Madoff investors; allow for faster, larger contributions to tax-free retirement accounts to make up for the losses incurred; and allow for penalty-free early withdrawals from retirement accounts for those in dire need because of their fraud losses.

Senator Schumer said the proposals were aimed at establishing a fairer tax treatment for those indirect investors, who tend to have a lower net worth than victims who invested directly with Mr. Madoff.

“That so many of the smaller investors, who may not have even known they were investing with Madoff, are not receiving the same assistance as direct investors is simply unfair,” Mr. Schumer said.

The Internal Revenue Service issued rules in April allowing direct investors to treat their Madoff losses as net operating losses, as if the individual investors were small businesses. That allowed them to “carry back” their losses for five years, instead of for three, and to carry any remaining losses forward for up to 20 years.

Those carry-back losses put cash in investors’ hands by providing refunds for taxes paid in past years, the senator explained.

But that ruling did not help indirect investors because the entities through which they invested — feeder funds, investment partnerships and the like — were too large to qualify for small-business status.

The provision would ensure that indirect investors would be eligible, at a minimum, to carry back 100 percent of their losses for four years and 50 percent for a fifth year.

The proposal would also raise the limit on tax-free contributions to retirement accounts so an investor can replenish losses quicker, and waive penalties for withdrawals from retirement accounts to increase cash flow.

Further, it would allow a surviving spouse to use more of the tax losses generated by a Madoff account even if the deceased spouse had been the original owner. And it would open a window during which victims can file amended estate and gift tax returns to recover taxes paid on gifts that were made from the fictional profits in their Madoff accounts.

NY Times

I don't understand what they mean by "indirect". Could someone explain this please? I am a victim in the Agape World Ponzi scheme. I lost $100,000 - everything I've spent my life saving for. This is my understanding so far:
1) We can't claim theft and loss on this money because Nicholas Cosmmo has not been convicted and we have not received any money back yet. We are supposed to wait until all of this is settled and then we can take this deduction over the course of 3 years.
2) But, then I read somewhere that the theft & loss has to be claimed in the tax year in which it was discovered. In the case of Agape that would be the 2008 tax year.

So, I am confused...do I wait or start to claim it now? I have an experienced and trusted accountant of 18 years, but I want to research this and fully understand it myself. Where can I research this further? The IRS website?

Thanks to anyone who can answer my questions!

Joel 2:25 "I will repay you for what the locusts have eaten."