Imagine losing your retirement savings to an AI-powered scam. Weeks later, another devastating surprise arrives, not from the scammer, but from the Internal Revenue Service (IRS).
According to Courtney Werning, principal attorney at Meyer Wilson Werning, that scenario is becoming increasingly common as sophisticated AI-driven scams persuade victims to withdraw money from retirement accounts under the false belief they’re making legitimate investments.
“The financial loss is devastating,” Werning explained. “But many victims don’t realise the tax consequences can make the damage even worse.”
It’s a little-known consequence of financial fraud that has become increasingly urgent as artificial intelligence (AI) fuels more convincing scams. According to the Federal Trade Commission, reported fraud losses reached US$12.5bil (RM51.11bil) in 2024, up from US$2.4bil (RM9.81bil) in 2020.
Behind those numbers are victims who not only lose their savings but may also owe taxes and sometimes a 10% early withdrawal penalty on money they never truly got to keep.
Victims are being punished twice
Werning has spent more than a decade representing investors harmed by financial misconduct. Increasingly, she’s seeing fraud victims face an unexpected second blow after the scam is over.
Many older Americans withdraw funds from their Individual Retirement Account (IRAs) or 401(k)s after scammers convince them they’re investing in lucrative cryptocurrency opportunities, protecting their assets, or responding to legitimate financial institutions. Those withdrawals become taxable income under US law, even when every dollar is stolen.
“The IRS still views those distributions as taxable,” Werning stated. “In many cases, victims owe taxes on money that criminals took from them.”
For younger victims, the consequences can be even harsher. Withdrawals made before retirement age may also trigger an additional 10% early withdrawal penalty, further compounding an already catastrophic loss.
AI has made fraud almost unrecognisable
Fraud is no longer limited to poorly written emails promising unexpected riches.
AI has dramatically raised the sophistication of scams through convincing deepfake videos, professional-looking investment platforms, cloned voices, and realistic virtual interviews.
During our conversation, Werning described how scammers often spend months building trust before asking victims to invest larger amounts.
One client believed they had found both companionship and a promising cryptocurrency investment after meeting someone online. Over time, the scammer encouraged increasingly larger investments and even sent a US$100,000 (RM408,900) check that appeared legitimate, reinforcing the illusion that the opportunity was real.
Eventually, the victim withdrew retirement savings to continue investing. The money disappeared. The tax bill remained.
“The sophistication of these scams has changed dramatically,” Werning explained. “People aren’t falling for obvious fraud anymore. They’re being manipulated through highly polished, convincing experiences.”
The FBI’s Internet Crime Complaint Center reported Americans lost over US$16.6bil (RM67.88bil) to cybercrime in 2024, with investment fraud generating the largest financial losses.
The emotional toll can be even greater
While the financial damage is staggering, Werning said the emotional consequences are often far worse.
She has represented victims who experienced overwhelming shame, depression, and isolation after realising they had lost retirement savings they spent decades building. In some cases, she said, the emotional burden became unbearable.
“These aren’t just financial losses,” Werning said. “They change people’s lives.”
US congress is trying to fix the problem
A bipartisan bill, the Tax Relief for Fraud Victims Act (HR 9500), seeks to address what many legal experts view as an unintended consequence of current US tax law.
If enacted, the legislation would restore theft-loss deductions for qualifying fraud victims, waive early withdrawal penalties tied to scam-related retirement withdrawals, and allow taxpayers to amend returns based on when the fraud occurred rather than when it was discovered.
Until then, Werning urged victims to preserve every piece of documentation, including bank records, wire transfers, communications with scammers, and law enforcement reports.
“If this legislation becomes law, documentation will matter,” she explained.
AI has transformed the scale and sophistication of financial fraud. Now lawmakers are racing to modernise tax rules written for a very different era.
For millions of Americans, the biggest shock may not be discovering they’ve been scammed.
It may be learning the government still expects them to pay taxes on money they never truly had. – Inc./Tribune News Service
