Recent Court Cases Show IRS Continues to Challenge Theft Loss Deductions

Federal tax law has long allowed theft loss deductions.  And even though the Tax Cuts and Jobs Act of 2017 (TCJA) substantially limited theft loss deductions for tax years after 2017, the IRS released a Chief Counsel memorandum in 2025 that clarified that taxpayers may continue to claim theft loss deductions related to for-profit transactions.  The only caveat:  the memorandum cautioned taxpayers that they must also meet the other statutory requirements applicable to theft loss deductions. 

Two of the more difficult requirements associated with theft loss deductions relate to the discovery year and whether a true theft has occurred.  Specifically, taxpayers may only claim theft loss deductions in the year that they discover the theft, provided there is also no reasonable prospect of recovery of the stolen funds at the end of such year.  In addition, the taxpayer must sufficiently show that a theft occurred under governing law, requiring an analysis of state and/or federal law. 

Two recent federal court cases suggest that the IRS will continue to scrutinize theft loss deductions post-TCJA.  In light of these cases, taxpayers who are victims of theft should ensure that they meet the specific requirements applicable to theft losses prior to claiming a corresponding deduction on their tax returns. 

Vaia v. United States

Shane Vaia filed a district court complaint against the federal government on May 12, 2026.  See Vaia v. U.S., No. 2:26-cv-00573 (S.D. Ohio).  In the compliant, Shane contends that the IRS improperly denied a refund claim related to over $800,000 of theft losses he incurred in 2024.  Specifically, the complaint alleges—

• He was a victim of a “pig butchering scam,” transferring the funds on the belief that he could generate substantial returns through cryptocurrency investments;
• He attempted to withdraw the funds in May 2024 but was unsuccessful;
• He reported the fraud to law enforcement in June 2024 and was told by government officials that there was little hope that they would recover the stolen funds;
• The fraudsters have never been identified, and he has not recovered any portion of the stolen funds. 

Shane filed an amended income tax return for his 2024 tax year and claimed the $824,740 theft loss deduction, reporting a refund of approximately $140,000.  Notably, Shane provided additional information with the amended return including a “detailed written explanation of the fraudulent scheme and the legal basis for the theft loss deduction” with “extensive supporting documentation… establishing his entitlement to the theft loss deduction, including transaction records, communications with the perpetrator, and reports to law enforcement authorities.”  However, the IRS formally denied the refund claim on February 16, 2026. 

The IRS has not filed an answer to the complaint and the case remains pending. 

Shaut v. Commissioner

On March 23, 2026, the Sixth Circuit Court of Appeals issued an opinion in Shaut v. Comm’r, No. 25-1568 (6th Cir.).  That case addressed a taxpayer’s claim to a $720,000 theft loss deduction for his 2019 tax year. 

In that case, Michael Shaut invested significant funds into an investment partnership in which he also worked with various other individuals. The federal government indicted the founding principal of the partnership, and the principal pleaded guilty to two counts of securities fraud and one count of wire fraud.  Michael lost some of his investment in the partnership and claimed a $720,000 theft loss deduction. 

The Tax Court denied the theft loss deduction, and Michael appealed his case to the Sixth Circuit.  The Sixth Circuit affirmed the Tax Court’s decision.  At issue was whether Michael had shown a theft under applicable law (here, Ohio) and whether he had offered proof to show that he could claim the loss in 2019. 

Concerning Ohio criminal law, the Sixth Circuit concluded that Michael had failed to sufficiently prove that he had lost the funds due to deception, threat, or intimidation as required under Ohio criminal law.  In addition, the Sixth Circuit found that he had failed to provide sufficient evidence that a theft occurred in 2019.  In this regard, the court noted that Michael had not introduced sufficient evidence of when he discovered the theft and, even if he had, he had failed to show that there was no reasonable prospect of recovery of the funds at the end of his 2019 tax year. 

Parting Thoughts

Vaia and Shaut show that the IRS will continue to police theft loss deductions post-TCJA.  Prior to claiming a theft loss deduction (which can be a large number on a tax return), taxpayers should ensure that they meet the requirements for claiming the deduction.  These requirements include the discovery year and whether theft actually occurred under state and/or federal law.  Taxpayers who fail to properly analyze these requirements risk a potentially expensive IRS audit and accuracy-related penalties. 

For questions concerning this blog post or any other IRS civil or criminal matter, please contact me at mroberts@meadowscollier.com.