Scammed, then taxed -- crime victims who are wiped out are getting IRS bills. Can this be fixed?

Chester Frilich is a lovely retired man who spends his free time helping pet owners train their puppies at the local dog park.

He is also the victim of a terrible scam that recently left him penniless, struggling to get by on Social Security alone. After that, he was told he owed $32,000 in taxes and that his Medicare premiums had gone up -- because his money had been stolen. He told me he's considered suicide because the situation felt so desperate; love for his 12-year-old Siberian Husky helps keep him going.

I promise, I'm not making this up. In fact, it's a trend. ¯\_(ツ)_/¯

Once in a while, you come upon a story that sounds so outrageous you just don't believe it the first time you hear it. I know I risk that with today's piece, so I implore you to keep an open mind as I explain to you how Americans who are the victims of heinous crimes are being taxed on those losses. Yes -- people who've lost everything get a bill from the IRS.

No one thinks this is a good idea -- it seems to be a quirk in the tax law introduced when the 2017 Tax Cuts and Jobs Act was passed. For today's story, I spoke with two U.S. senators -- Republican Bill Cassidy and Democrat Richard Blumenthal -- who have introduced legislation to fix this issue. There's only a few days left before Congress shuts down for the session, so after you read or listen to this story, I hope you'll consider taking action to support their proposal. So let me offer a few more details about what's going on here. But I urge you to listen to this week's episode of The Perfect Scam so you can really feel how painful this situation is for Chester, how unfair it is, and how simple the fix can be.

Chester received a call recently from an operator who said he worked with Xfinity. He was told his Internet connection had been hacked -- the caller even had Chester's router password. So after offering to fix the problem, the operator scanned Chester's computer and claimed that criminals had used it to commit money laundering. Chester was now a suspect, and his financial accounts would be frozen -- unless he cooperated. Then, day after painful day, a parade of menacing callers persuaded Chester to empty his bank accounts and his retirement accounts and transfer the funds to accounts they controlled. Before it was over, criminals had stolen more than $200,000 from him.

Chester had liquidated his tax-advantaged retirement accounts to accommodate the criminals' demands. The IRS and his state tax agency both told him that meant the withdrawals were taxable as income, even if the money went right to the criminals. The "income" would also impact his price Medicare premiums.

"I said to the federal guy, I said, well, how do you expect me to pay for this? I've been wiped out," Chester told me. "And he says, 'Well, we have different programs, which you can borrow money from us and pay it back over time, if you have enough income to pay for it. But if you don't, then we're going to have to lien your property.”

Those chilling words -- even the suggestion that his home was at risk -- sent Chester to a dark place.

"Oh, that cost me a lot of sleep and a lot of night terror. Fortunately, there were people at the dog park that I knew very well. I, I almost felt like committing suicide. And I had considered it. Because I just wanted out. I'd lost everything," he said. "And it was my intention to give that to somebody that I love, my house when I die, and money so that they could have a good life. And it was gone. My dream of doing that was gone. So I'm just going, what do I have? And I have the dog, and I thought about it, and I said, I can't leave the dog."

By now, you might be thinking that Chester's story is some kind of weird one-off; it's not. A recent report commissioned by the U.S. Senate Committee on Aging, called Scammed Then Taxed, has found endless examples of people in Chester's situation. As I've written many times, scam losses are exploding in the U.S.; criminals often target retirement accounts. Withdrawals under pressure from traditional IRAs or 401(k)s bring with them consequences that victims rarely understand.

"These kinds of fraud losses are so common and heartbreaking," Sen. Blumenthal told me. "It is hard to swallow, almost beyond words. It is so contrary to what we think are the basic notions of justice that a government agency should be living by. You know, it adds additional injury to the injury already suffered."

How did we get here? Things didn't always work this way. I'll let AARP lawyer Clark Flynt-Barr explain:

"There used to be a tax deduction that people could leverage here that helped to sort of mitigate what you owed," she told me. "So prior to 2018, households who itemized their deductions could deduct their unreimbursed losses that arose from property losses like fire, storm, flooding, or from theft losses from their income when they were filing their taxes. But in 2017, Congress passed the Tax Cuts and Jobs Act, and one of the things that they did was they consolidated and removed a number of deductions, including the casualty and theft loss deduction."

Back in 2017, scams weren't happening on the scale they do today, so the change didn't get much attention, she says, and no one intended to punish people like Chester with the change. But there is hope.

You might have heard that the 2017 tax cuts will expire next year. If Congress does nothing, the old deduction for fraud losses will be restored. But that wouldn't help victims like Chester, who've been hit with IRS bills since 2017. So Cassidy and Blumenthal have introduced the Casualty Loss Deduction Restoration Act, which would be retroactive. Overnight, it would ease the burden on Chester and people like him.

"Our goal as Americans should be...help fellow Americans. Our goal should be that people live in independence, not in dependence," Sen. Cassidy told me. "Being financially secure is part of living independently. So our goal here with our legislation is to allow someone like Chester to continue to live independently by getting a credit for the fraud that he has been subject to."

The tax deduction would also apply to people who suffer unreimbursed losses from fire or natural disasters, too.

It's likely a new tax bill will be passed next year, and Congress will have the chance to address this issue then. But Blumenthal said he hasn't given up hope that their fix could still be taken up by the current Congress in the waning days of the Biden administration.

"I'm always hopeful, particularly with a bipartisan measure like this one, and the pressing, heartbreaking losses suffered by people as a result of the recent hurricanes and other natural disasters, and potentially even ongoing in the next couple of months as we go through the beginning of winter," he said. "So yes, I'm, I'm very hopeful and I'm going to be fighting for it. "

If you are interested, you can reach out to your U.S. senator or Representative and express support for the legislation. I should mention that AARP, which pays for this podcast, supports the Blumenthal-Cassidy bill.