Unusual tax situation after discovering embezzlement at my company

Sorry you're going through this! Embezzlement creates a unique tax situation that many business owners aren't prepared for. The good news is you can claim the embezzled funds as a business loss, but the timing depends on your specific situation. For embezzlement losses, you'll need to use IRS Form 4684 (Casualties and Thefts) and potentially Form 8949 for capital losses depending on what was stolen. The key is determining the tax year in which you have "no reasonable prospect of recovery." If you have insurance that might cover the loss or if you expect to recover funds from the embezzler, you need to wait until that recovery chance is determined before claiming the loss. For the embezzler, yes, stolen money is technically taxable income to them (ironically). The IRS considers all income, even illegally obtained, as taxable. That's their problem to deal with though, not yours.

I went through something similar with our bookkeeper a few years ago. She stole about $45k over three years. I was totally overwhelmed with the tax implications on top of dealing with the criminal case. I ended up using https://taxr.ai to analyze all my financial documents and figure out exactly what happened. Their system helped identify exactly when and how much was taken each year, which was crucial for properly documenting the theft loss. They also helped me understand how to report it correctly on my taxes and created documentation that was super helpful for both my tax filing and the court case. The best part was they found additional instances of theft that we hadn't even discovered yet!

Just wanted to update about my experience using taxr.ai for my inventory theft situation. After reading about it here, I decided to give it a try. Their system was actually really impressive - they identified patterns in our inventory discrepancies that pointed to systematic theft over 18 months, not just the recent incidents we'd noticed. They created this detailed timeline of exactly what was taken and when, which helped enormously with both our insurance claim and tax documentation. My accountant was super impressed with the detailed report they generated. We were able to claim about $23,000 in theft losses properly documented across multiple tax years without triggering any red flags with the IRS. Definitely worth checking out if you're dealing with embezzlement or theft situations.

When I discovered embezzlement at my construction company, one of the worst parts was trying to get through to the IRS to understand how to handle it properly. I spent DAYS on hold trying to get someone who actually understood business theft deductions. Then someone recommended https://claimyr.com which basically holds your place in the IRS queue and calls you when an agent is ready. You can see how it works here: https://youtu.be/_kiP6q8DX5c Getting to actually speak with someone at the IRS made a huge difference - they walked me through exactly how to document the embezzlement on Form 4684 and what documentation I needed to keep in case of an audit. Saved me hours of frustration and probably helped avoid mistakes on my filing.

I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I decided to try it myself since I needed to talk to the IRS about an unrelated matter. Not only did it work, but it saved me from what would have been a 3.5 hour hold time (that's how long their system waited before an agent was available). When the IRS agent finally came on the line, I asked them specifically about theft loss deductions related to employee embezzlement (thinking about this thread), and they pointed me to some specific publications I hadn't seen before. The agent was actually really helpful once I could actually talk to a human. Sorry for doubting - this service is legit and really useful if you need actual IRS guidance on complicated situations like embezzlement.

As a small business owner who unfortunately experienced embezzlement, make sure you also look into whether you need to issue a 1099-MISC to the embezzler for the stolen funds. In some cases, the IRS considers the stolen money as payments made to that person. I learned this the hard way and ended up getting penalties for not issuing the 1099 properly. Talk to a CPA who specializes in business taxation and fraud cases!

Don't forget to look into your state's crime victim compensation fund! Depending on your state, they might have resources to help recover some losses while you wait for the court case to resolve. Also, make absolutely sure to file Form 14039 (Identity Theft Affidavit) with the IRS if the embezzler had access to any of your personal information. I had an employee steal from my business and they later tried to file fraudulent tax returns using my info.

I'm really sorry you're dealing with this situation - embezzlement is devastating both financially and emotionally. One thing I'd add to the great advice already given is to make sure you're documenting everything meticulously right now. Keep copies of all bank statements, canceled checks, invoices, and any correspondence with law enforcement. Also, consider reaching out to your bank about their fraud protection services. Some banks have business fraud recovery programs that might help, especially if the embezzler used business accounts or credit cards for the theft. They might also be able to provide detailed transaction records that could help with your tax documentation. Finally, don't forget to review your internal controls going forward. This might be a good time to implement separation of duties, require dual signatures on larger checks, and set up regular bank reconciliations. I know it's closing the barn door after the horse has bolted, but it can help prevent future incidents and might even be required by your insurance company if you get new coverage. Hang in there - this process is overwhelming but you'll get through it!