Pig butchering scams are on the rise, targeting unsuspecting victims with promises of high returns on investments—often involving cryptocurrency or retirement savings. Scammers take their time building trust, usually through social media or professional platforms like LinkedIn, before convincing victims to move their money into fake investments. By the time the victims realize they’ve been duped, it’s too late—the money is gone, and the scammers have vanished without a trace.

What makes these scams especially devastating is the double hit victims take: not only do they lose their hard-earned savings, but they also face unexpected tax bills. When funds are withdrawn from retirement accounts—like IRAs or 401(k)s—victims must pay income tax on the withdrawal, plus a potential 10% penalty if they’re under 59½. Even when the money has been stolen, the IRS still requires taxes to be paid.

What Are Pig Butchering Scams?

Pig butchering scams are investment fraud where scammers take their time “fattening up” their victims before draining their financial accounts. These scams have become so prevalent recently, the IRS Office of Chief Counsel issued a memorandum in March 2025 clarifying that certain theft losses from scams like these may still be deductible, even after recent changes limited such deductions. While not every situation will qualify, this shows the IRS is taking this issue seriously.

Unlike quick scams aimed at stealing money on the spot, pig butchering schemes are built on patience and manipulation. The fraudsters invest weeks, even months, building relationships and establishing trust with their targets. They often reach out through platforms like LinkedIn or WhatsApp, posing as professionals with supposed insider knowledge of lucrative investment opportunities.

The scam usually begins with casual conversations, often initiated under the guise of a mistaken message or a friendly networking attempt. Once the victim is engaged, the scammer slowly transitions the conversation toward financial topics, usually dangling the prospect of high returns from sophisticated investments. Fake investment platforms are a popular choice, especially those dealing in cryptocurrency. Victims are encouraged to transfer funds from legitimate retirement accounts, such as IRAs or 401(k)s, with promises that these alternative investments are safer and offer better returns than traditional investments.

To make the scheme appear legitimate, some scammers even allow their victims to withdraw small amounts as supposed “returns” on their investment. This tactic cements the victim’s trust and encourages them to invest even more. Unfortunately, once the scammer feels they’ve extracted enough money, they disappear, leaving the victim with an empty bank account and devastating financial consequences.

Tax Consequences for Victims

The pain of a pig butchering scam doesn’t end when the scammer walks away with the money. Victims who transferred funds from retirement accounts face additional tax burdens that only add salt to the wound. 

Here’s why:

1. Income Tax: When money is withdrawn from traditional IRAs or 401(k)s, it’s treated as taxable income by the IRS. This means victims may end up with a substantial tax bill, even if their money was immediately stolen. The IRS isn’t concerned with what happens to the funds after they’re withdrawn—the tax obligation is triggered the moment the money leaves the retirement account.
2. Early Withdrawal Penalty: Victims under the age of 59½ face an additional 10% penalty on top of the regular income tax. For instance, if you withdraw $100,000 from your retirement account, you could owe $10,000 in penalties plus income tax on the entire amount.
3. No Automatic Relief: The IRS won’t automatically forgive the tax liability just because the money was stolen. While there are avenues for seeking relief, they aren’t guaranteed and require following specific procedures to qualify.
4. Potential for Deductions: The IRS does allow for theft loss deductions under certain circumstances. If you can prove that your losses were part of a transaction entered into for profit, you might be eligible for relief. However, this is a complex process that often requires professional guidance to navigate successfully.

The recent IRS memo offers new clarity, confirming that theft losses from scams, such as pig butchering, may still be deducted. This comes as welcome news to many tax professionals and victims alike.

In a recent Tax Notes article covering the memo, our firm’s founding attorney Alyssa Maloof Whatley commented on the significance of the IRS’s position: “This memo provides much-needed clarity for scam victims who feel helpless. It gives us a framework to help our clients seek relief when they’ve already suffered so much.”

What to Do if You’re a Victim

If you’ve been targeted by a pig butchering scam, it’s critical to act fast. Your first priority should be reporting the scam to the appropriate authorities to establish a formal record of what happened.

1. Report the Scam: File a complaint with the FBI’s Internet Crime Complaint Center (IC3). This helps federal agencies track down scammers and potentially prevent future attacks.
2. Contact the Federal Trade Commission (FTC): Report the incident to the FTC to provide additional documentation and enhance your case if you decide to pursue tax relief.
3. File a Police Report: Your local law enforcement agency may not be able to retrieve your stolen funds, but filing a police report is still important. It helps create a paper trail that you can use to support your claim for a theft loss deduction when dealing with the IRS.

Taking these steps quickly improves your chances of successfully claiming theft loss deductions. While reporting the scam doesn’t guarantee a positive outcome, it strengthens your position when you begin the process of filing with the IRS.

Take Control of Your Financial Recovery

Falling victim to a pig butchering scam is devastating, but it’s not the end of the road. Thanks to the new IRS memo, victims now have a stronger basis for claiming theft loss deductions, under Section 165(c)(2), but the process is complex and full of potential pitfalls. Acting quickly is essential because the longer you wait, the harder it becomes to gather the necessary evidence and properly file your claim.

This is where a skilled tax lawyer can make all the difference. The Law Offices of Alyssa Maloof Whatley has experience helping scam victims navigate the intricate requirements of the IRS and build a strong case for tax relief. From preparing Form 4684 to guiding you through the Private Letter Ruling process, having a knowledgeable advocate on your side can significantly improve your chances of successfully reducing your tax burden.

You shouldn’t have to face this alone. If you’ve been hit with a tax bill from a pig butchering scam, the time to act is now. Contact the Law Offices of Alyssa Maloof Whatley today to discuss your case, explore your options, and start reclaiming control of your financial future.