No Penalties for Victims of Fraud Act

Bill Number

H.R. 2163

Origin Chamber

House

Congress

119th Congress, Session 1

Policy Area

Taxation

Status

Introduced

Latest Action

2025-03-14: Referred to the House Committee on Ways and Means.

Last Updated

2025-05-09T13:52:59Z

AI-Generated Summary

Purpose

The "No Penalties for Victims of Fraud Act" (H.R. 2163) aims to provide tax relief to individuals who are victims of fraud by waiving the standard 10% penalty on early withdrawals from certain retirement accounts. This helps victims avoid additional financial penalties when they must access funds due to fraudulent acts.

Key Provisions

• Waiver of Penalties: Adds a new exception to Internal Revenue Code (IRC) Section 72(t)(2), allowing penalty-free distributions from eligible retirement plans (such as 401(k)s or IRAs, but not defined benefit plans like traditional pensions) if the withdrawal is due to the individual being a victim of fraud.
• Definition of Victim: An individual qualifies as a "victim of fraud" by:
• Submitting an application to the Secretary of the Treasury (IRS) with required documentation.
• Providing evidence from a law enforcement agency or court showing the fraud directly led to the retirement plan withdrawal.
• Receiving official designation from the Secretary.
• Repayment Option: Victims can repay the withdrawn amount to their retirement plan, similar to rules for other penalty waivers (e.g., for medical expenses), to restore their savings without tax consequences.
• Effective Date: Applies to distributions made after the bill's enactment.
• Guidance and Outreach: The Treasury Secretary must issue guidance on the waiver process within 180 days of enactment and launch a public awareness campaign to inform people about this relief.

Significant Changes to Existing Law

• Modifies IRC Section 72(t)(2), which lists exceptions to the 10% early withdrawal penalty on retirement distributions before age 59½.
• Introduces a new fraud-specific exception (subparagraph N), expanding the list of qualifying circumstances beyond existing ones like disability, medical emergencies, or first-time home purchases.
• Requires IRS involvement in verifying claims through documentation, creating a new administrative process not previously in place for fraud victims.

Potential Impacts

• On Citizens: Reduces financial hardship for fraud victims by eliminating the penalty tax (which can add 10% to the withdrawn amount), potentially encouraging more people to report fraud and recover funds without fear of extra costs. It may help preserve retirement savings if amounts are repaid.
• On Government Agencies: Increases workload for the IRS and Treasury Department in processing applications, issuing designations, and conducting outreach; could lead to higher administrative costs but also improve fraud reporting to law enforcement.
• On International Relations: No direct impact, as the bill focuses on domestic tax policy.

Main Stakeholders Affected

• Fraud Victims: Primary beneficiaries, especially those with retirement accounts targeted by scams (e.g., identity theft or investment fraud).
• Retirement Plan Holders and Administrators: Individuals with 401(k)s, IRAs, or similar plans; plan providers may need to adjust processes for distributions and repayments.
• Government Entities: IRS (for applications and designations), Treasury Department (for guidance and campaigns), law enforcement agencies, and courts (for providing documentation).
• Taxpayers Generally: Indirectly affected through potential changes in IRS resource allocation.

Notable Legal, Constitutional, or Political Implications

• Legal: Establishes a clear, evidence-based process for penalty waivers, relying on third-party documentation to prevent abuse, which could set a precedent for future victim-relief tax provisions. No changes to overall tax liability on the distribution itself—only the penalty is waived.
• Constitutional: Aligns with Congress's authority to regulate taxation (under Article I, Section 8); no apparent conflicts with due process or equal protection, as the process is uniformly applied with documentation requirements.
• Political: Promotes victim support in an era of rising financial fraud, potentially appealing across party lines by addressing consumer protection without broad tax cuts; may influence future legislation on scam prevention or retirement security.

This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.

Sponsor

Rep. Stevens, Haley M. [D-MI-11]

Recent Actions

• 2025-03-14: Referred to the House Committee on Ways and Means.
• 2025-03-14: Introduced in House
• 2025-03-14: Introduced in House

Bill Versions

• No Penalties for Victims of Fraud Act — issued 2025-03-14 — PDF (4 pages)