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A New Bill Could Let Fraud Victims Undo Taxes on 401(k) and IRA Withdrawals

Scam victims could get refunds on past 401(k) and IRA withdrawals.

By Jordan Major , Edited by Laura Hohenstein

Updated Nov. 10, 2026

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Americans who lose money to scammers might face another financial blow if they withdraw money from a 401(k) or IRA because of the fraud. The consequences may be particularly serious when retirement savings are stretched thin, as victims could owe income tax plus a 10% early-withdrawal penalty, depending on their age and circumstances.

A bipartisan bill that overwhelmingly passed the House could provide relief. The Tax Relief for Fraud Victims Act would create special rules allowing certain scam victims to avoid the additional 10% tax, repay money they withdrew from retirement, and potentially claim refunds for taxes already paid.

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Scam victims may owe taxes and penalties on 401(k) and IRA withdrawals

Taking money from a traditional 401(k) or IRA generally creates taxable income. If you're younger than 59.5, you may also owe a 10% additional tax unless an exception applies.

Consider a 50-year-old who takes a $25,000 fully taxable distribution after suffering a qualifying fraud loss. If that money falls within the 22% federal income tax bracket, it could generate $5,500 in federal income tax plus another $2,500 from the 10% additional tax.

That's potentially $8,000 going to federal taxes after you've already suffered a financial loss. A $50,000 withdrawal under the same simplified assumptions could mean $11,000 in ordinary federal income tax and another $5,000 from the additional 10% tax.

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The bill could eliminate the 10% early-withdrawal penalty

The Tax Relief for Fraud Victims Act, introduced by Reps. Max Miller and Tom Suozzi, would create a new exception to the 10% additional tax for qualifying retirement distributions connected to theft involving fraud, deceit, or misrepresentation.

Using the examples above, that could potentially eliminate $2,500 of additional federal tax on a qualifying $25,000 withdrawal or $5,000 on a $50,000 withdrawal.

The provision would apply to qualifying withdrawals made after December 31, 2020, meaning some people who already paid the additional tax could potentially benefit.

How repaying a retirement withdrawal could help scam victims recover taxes

The bill doesn't stop with the 10% tax. It would also allow qualifying fraud-related distributions to be repaid into an eligible retirement account.

Generally, the repayment window would run for one year beginning the day after you discover the qualifying loss. That could matter if you've recovered stolen funds, received compensation, or rebuilt enough savings to replace some of the retirement money you took out.

Repaying an eligible distribution could also allow victims to recover some of the ordinary income tax previously paid on the amount repaid, depending on their circumstances.

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Scam victims could claim refunds on past retirement withdrawal penalties

The House-passed bill would give qualifying victims more time. For refund claims involving the 10% additional tax on qualifying retirement distributions, the deadline generally couldn't expire earlier than one year after the taxpayer discovers the qualifying loss.

There is also special treatment for people who discover fraud before the bill becomes law. In those cases, the legislation generally substitutes the enactment date when determining the new one-year window. That means someone who withdrew retirement money several years ago and thought the refund deadline had already passed could potentially get another opportunity to file a claim.

Not every scam-related withdrawal would qualify

The bill wouldn't waive taxes on every scam-related withdrawal, as the distribution would have to meet the legislation's qualifying fraud-loss rules.

This matters because the exact circumstances surrounding the fraud, the withdrawal, and the loss could determine whether the special retirement rules apply.

The bill also contains broader changes to theft-loss deductions, but those provisions are secondary to the retirement-account issue here. The important point for someone who tapped a 401(k) or IRA is that qualifying withdrawals could receive both penalty relief and new repayment and refund opportunities.

Don't amend your return yet

None of this relief is available yet. The House passed the Tax Relief for Fraud Victims Act 408-17 on September 15. The Senate received H.R. 9500 the following day and referred it to the Finance Committee, where it remains.

Until it becomes law, someone who paid tax on a scam-related retirement withdrawal shouldn't assume those taxes can already be recovered.

Keeping records could still be worthwhile if you've taken money from a retirement account because of fraud since 2021. That includes tax returns, 401(k) or IRA statements, distribution records, documents showing the fraud, and evidence of when you discovered the loss.

Those dates and records could become particularly important because the bill's refund and repayment windows are tied to when the fraud was discovered.

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Bottom line

The Tax Relief for Fraud Victims Act could give some scam victims a chance to revisit taxes they already paid after withdrawing money from a 401(k) or IRA. Victims may also be able to repay eligible withdrawals and seek refunds of the 10% additional tax, with further income-tax relief potentially available when qualifying distributions are repaid.

The bill isn't law yet, but its retirement provisions would reach back to qualifying distributions made after 2020. Affected taxpayers looking to make the right moves should keep their old retirement and tax records rather than assume those past tax bills are permanently settled.

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