Weeks later, another devastating surprise arrives, not from the scammer, but from the 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 realize 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 fuels more convincing scams. According to the Federal Trade Commission, reported fraud losses reached $12.5 billion in 2024, up from $2.4 billion in 2020.

Behind those numbers are victims who not only lose their savings but may also owe taxes and sometimes a 10 percent 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 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, 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 percent early withdrawal penalty, further compounding an already catastrophic loss.

AI has made fraud almost unrecognizable

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 $100,000 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 Centerreported Americans lost over $16.6 billion 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 realizing 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.”

Congress is trying to fix the problem

A bipartisan bill, the Tax Relief for Fraud Victims Act (H.R. 9500), seeks to address what many legal experts view as an unintended consequence of current 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 modernize 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.

This was published on Inc.com first.

Click the Inc.com link to read the full article: https://www.inc.com/netta-jenkins/ai-stole-their-life-savings-then-the-irs-sent-them-a-tax-bill/91384761

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About Netta Jenkins, Founder of HIC, a workplace consulting firm.

From securing an $8M breakthrough inside a global fintech to being named CEO of the very platform she built, Netta Jenkins has mastered the art of turning bold ideas into lasting business transformation. With a LinkedIn community of over 200,000, she’s the tech CEO redefining how organizations drive employee engagement and performance through AI.

A two-time Wiley author, Netta’s work has been amplified by Arianna Huffington to more than 10 million people. Her latest book, Supercharged Teams: How Every Manager Can Create a Culture of Excellence, gives leaders the playbook to transform everyday teams into high-performing powerhouses.

As founder of HIC, a workplace consulting firm and creator of HIC HR Hub, a private community for senior HR leaders to share and gain new insights.

She also hosts Beyond Management™, a viral LinkedIn leadership series with over 50 million impressions, where she sparks street-level conversations that elevate employer brands, attract top talent, and inspire customers.

A seasoned TEDx and international keynote speaker, Netta has energized audiences across the U.S., Ghana, the Netherlands, and Turkey with bold insights and measurable takeaways. With 15+ years of global advisory experience, she shares weekly video tips that empower managers at every level.

Her work has been featured in The Washington Post, McKinsey, Forbes, Fortune, and more. Named one of CIO Views’ Top 10 Most Influential Black Women in Business to Follow, Netta helps organizations connect workplace culture, technology, and performance to deliver measurable, lasting impact.

Previously serving as VP of Global Inclusive Strategy at IAC, Netta partnered with brands like Match.com, Vimeo, and Daily Beast. She advises Betterment, consults executives via the Intro app, and is pursuing a doctorate in quality systems. Currently, she collaborates with Marc Lore (former CEO of Walmart) and Preet Bharara (former U.S. Attorney for the Southern District of New York) to build Telosa, a visionary new city in America.

Residing on the East Coast with her family, Netta continues to make a transformative impact in both the corporate and startup landscapes.