Lori Flowers lost $600,000 in a sophisticated fraud scheme known as a “pig-butchering” scam, only to face an additional tax liability on the stolen funds, highlighting challenges faced by victims of financial scams in the United States. Flowers, a North Carolina resident, had initially believed she was helping a close friend when she withdrew money from her 401(k) to lend $400,000 to a man claiming to be from Brussels. The relationship began through LinkedIn and escalated over several months before Flowers realized the man was a fraudster, later suspected to have used artificial intelligence to maintain the deception.

After the scam was revealed, Flowers was confronted with a tax bill of approximately $225,000 for the stolen funds, as the Internal Revenue Service treated the fraudulent withdrawals as taxable income. Struggling to manage the unexpected financial burden, she filed for Chapter 13 bankruptcy. The tax treatment of stolen funds stems from changes made in 2017 when Congress, as part of the Tax Cuts and Jobs Act, eliminated a provision allowing victims of theft to deduct losses. This change removed legal protections that had previously shielded scam victims from owing taxes on stolen money.

Congressional lawmakers and consumer advocates have expressed concern about the impact of the law on victims like Flowers. Chuck Bell, programs director for advocacy at Consumer Reports, noted the bipartisan consensus around addressing the issue, describing the 2017 tax provision cut as an “awful” element of the tax code. Clark Flynt-Barr, government affairs director at AARP, emphasized that lawmakers were often surprised to learn that the IRS taxes money stolen from victims, highlighting how these individuals face compounding financial harm by owing taxes on funds they will never recover.

The problem is widespread, with AARP citing federal data indicating that Americans aged 60 and over reported $7.7 billion in losses to fraud in 2025 alone, although actual losses may be significantly higher due to under-reporting driven by embarrassment or shame. Rep. Zach Nunn, a Republican from Iowa, has supported efforts to help victims and prevent future scams. He cited a case involving an Iowa farmer targeted in a similar international pig-butchering scam, which escalated to threats involving armed individuals trying to seize cash from the victim.

In response, Congress has introduced legislation aimed at restoring tax relief for fraud victims. The Tax Relief for Fraud Victims Act, which passed the House on September 15, would reinstate the ability for scam victims to deduct losses related to theft and prevent the IRS from taxing stolen monies as income. The bill now awaits consideration by the Senate, with bipartisan support anticipated.

In addition, lawmakers have proposed the Guarding Unprotected Aging Retirees from Deception Act (GUARD Act) to provide state and local law enforcement agencies with federal funds to better investigate and combat financial scams targeting older Americans. This includes resources for training and technological tools essential for addressing crimes that often cross international borders. The GUARD Act has also passed the House and is pending Senate action.

Both measures aim to reduce the financial and emotional toll of scams on victims and enhance law enforcement’s ability to respond to an increasingly complex and prevalent form of financial crime.