A5508

An Act allowing a gross income tax deduction for certain theft losses, providing tax relief for certain victims of financial fraud, and supplementing Title 54A of the New Jersey Statutes.

Be It Enacted by the Senate and General Assembly of the State of New Jersey:

1. a. A resident taxpayer who sustains a loss arising from theft, for which a federal theft loss deduction is allowed pursuant to paragraphs (2) or (3) of subsection (c) of section 165 of the federal Internal Revenue Code, 26 U.S.C. s.165, shall be allowed a deduction from the taxpayer’s gross income for the taxable year in which the loss occurred, in the form and manner as shall be provided by the director. The amount of the deduction shall be equal to the amount of the federal theft loss deduction allowed pursuant to paragraphs (2) or (3) of subsection (c) of section 165 of the federal Internal Revenue Code, 26 U.S.C. s.165, for the taxable year in which the loss occurred.

b. No deduction shall be allowed pursuant to this section for any cost, expense, or loss included in the calculation of any category of income pursuant to N.J.S.54A:5-1 that is net of expenses, or in the calculation of any other deduction, credit, or exemption allowed by law, for the taxable year in which the deduction is claimed.

c. For purposes of this section, “theft” has the same meaning as defined for federal income tax purposes, including, but not limited to, any criminal appropriation of another’s property to the use of the taker, including theft by swindling, false pretenses, and any other form of guile, and including larceny and embezzlement.

2. a. A resident taxpayer who demonstrates to the satisfaction of the director that the taxpayer was the victim of a fraudulent scheme or transaction, including, but not limited, to financial fraud, theft by deception, identity theft, financial exploitation, or other comparable fraudulent conduct, may apply to the director for taxpayer relief pursuant to this section.

b. Upon approval of an application submitted pursuant to subsection a. of this section, the director shall waive any penalty imposed under the "New Jersey Gross Income Tax Act," N.J.S.54A:1-1 et seq., that is attributable to the taxpayer's failure to timely file a return or pay a tax liability resulting from, or substantially related to, the fraudulent scheme.

c. Upon approval of an application submitted pursuant to subsection a. of this section, the director shall offer the taxpayer an installment payment agreement for any outstanding tax liability resulting from, or substantially related to, the fraudulent scheme. The term of the installment payment agreement shall be determined by the director based upon the taxpayer's financial circumstances, the nature and extent of the financial loss resulting from the fraudulent scheme, and any other factors deemed relevant by the director, except that the term shall not exceed a period of more than 120 months.

d. The director may require a taxpayer seeking relief pursuant to this section to submit documentation substantiating the fraudulent scheme, including a police report; a court record; a report filed with a federal, State, or local governmental agency; a determination by a financial institution; or any other documentation the director deems appropriate to establish that the taxpayer was the victim of a fraudulent scheme.

e. The director shall render a determination on an application submitted pursuant to subsection a. of this section within 180 days of receipt of a completed application.

f. While an application submitted pursuant to subsection a. of this section is pending review, the director shall suspend collection activity relating to the tax liability that is the subject of the application, provided that the taxpayer has submitted all documentation reasonably requested by the director.

g. Interest shall not accrue on any tax liability subject to an application submitted pursuant to subsection a. of this section during the period in which the application is under review by the director. If an application submitted pursuant to subsection a. of this section is denied, interest shall accrue as otherwise provided by law for the period beginning on the date the application was submitted and ending on the date of the director's determination.

h. The relief provided pursuant to subsections f. and g. of this section shall apply only to applications submitted in good faith, as determined by the director. The director may terminate the relief provided pursuant to subsections f. and g. of this section upon a determination that an application was submitted in bad faith or contains a material misrepresentation.

i. Nothing in this section shall be construed to reduce or eliminate any underlying tax liability otherwise owed by a taxpayer.

3. This act shall take effect on the January 1 next following the date of enactment.

STATEMENT

This bill allows gross income tax deduction for certain losses for which a federal theft loss deduction is allowed and authorizes the Director of the Division of Taxation (director) to grant tax penalty relief and tax installment payment agreements for certain victims of financial fraud. The bill responds to the growing prevalence of financial fraud schemes targeting New Jersey residents, particularly senior citizens and vulnerable adults, which can leave victims facing substantial State tax liabilities, penalties, and interest, in addition to devastating financial losses.

Under the bill, a taxpayer who is allowed to claim a theft loss deduction for federal tax purposes would also be permitted to claim a deduction, in the same amount, for State gross income tax purposes. However, the bill provides that no amount of the deduction would be allowed for any cost, expense, or loss that is also included in the calculation of any category of income that is net of expenses, or in the calculation of any other deduction, credit, or exemption that is allowed for the taxable year in which the deduction is claimed.

Under the federal income tax provisions referred to in this bill, a theft loss deduction is generally allowed for individuals who sustain losses as part of a transaction entered into for profit but not associated with a trade or business. Accordingly, individuals who fall victim to certain fraudulent schemes are permitted to claim the federal deduction, provided that the fraudulent scheme involved a profit motive. The Internal Revenue Service has issued guidance concerning the types of fraudulent schemes and investment arrangements in which the theft loss deduction is generally permitted, which schemes may include those in which an individual has been defrauded into making withdrawals or transfers from existing investment arrangements, including Individual Retirement Accounts (IRAs), for the alleged purpose of safeguarding or reinvesting these funds.

Under the bill, “theft” has the same meaning as defined for those federal income tax purposes, including, but not limited to, any appropriation of another’s property to the use of the taker, including theft by swindling, false pretenses, and any other form of guile, and includes larceny and embezzlement.

Not all victims of financial fraud qualify for a federal theft loss deduction. Even when a taxpayer is not eligible for the deduction, financial fraud may result in significant State tax liabilities arising from withdrawals, transfers, liquidations, or other financial transactions undertaken in connection with the fraudulent scheme. This bill is intended to provide targeted administrative relief to those taxpayers while preserving the State's ability to collect any underlying tax liability.

The bill also allows a resident gross income taxpayer who falls victim to a fraudulent scheme or transaction, including, but not limited to, financial fraud, theft by deception, identity theft, financial exploitation, or other comparable fraudulent conduct, to apply to the director for relief from any penalty imposed under the "New Jersey Gross Income Tax Act," N.J.S.54A:1-1 et seq. To qualify for the relief, the penalty imposed under the gross income tax is required to be attributable to the taxpayer's failure to timely file a return or pay a tax liability resulting from, or substantially related to, the fraudulent scheme. Upon approval of an application for relief, the director is required to allow a taxpayer to enter into an installment payment agreement for any outstanding tax liability resulting from, or substantially related to, the fraudulent scheme. These provisions are intended to provide meaningful relief to victims of financial fraud while ensuring that taxpayers remain responsible for any underlying tax liability owed to the State.

The director may require a taxpayer seeking relief to submit documentation substantiating the fraudulent scheme, including a police report; court record; report filed with a federal, State, or local governmental agency; determination by a financial institution; or any other documentation the director deems appropriate to establish that the taxpayer was the victim of a fraudulent scheme.

While an application for relief is pending review, the director is also required to suspend collection activity relating to the tax liability that is the subject of the application, provided that the taxpayer has submitted all documentation reasonably requested by the director. Additionally, interest may not accrue on any tax liability subject to an application for relief during the period in which the application is under review by the director. However, these forms of additional relief would only be allowed for applications submitted in good faith, as determined by the director, and any interest that did not accrue during the review period will accrue retroactively if the application is denied. These temporary protections are intended to prevent taxpayers from being subject to collection activity or accruing additional interest charges while the director evaluates a good-faith application for relief, while preserving the State's authority to impose interest retroactively if an application is denied.