Under this provision, investors typically file amended tax returns going back three years from the date they discover a fraud. They then claim on their current federal returns a theft-loss reduction equal to the lost principal. Deductions for such losses generally can be carried back three years or forward 20 years. Money recovered through insurance or lawsuits is excluded.  The deduction probably would work reasonably well for people who invested with Mr. Madoff recently. His long-term investors, however, would probably recover little.  Nonetheless, in informal legal writings, the I.R.S. has supported another avenue in such cases, one that discourages investors from seeking tax refunds and amending prior returns but that greatly increases the deductions, according to Solomon L. Warhaftig, a senior tax partner at Proskauer Rose in New York.  According to a 2004 I.R.S. memorandum, investors who have been cheated in Ponzi schemes should not file amended returns and seek tax refunds. Instead, they should claim a theft-loss deduction equal to the amount of their original investment, plus any phantom interest or income obtained over all the years.  Investors cannot include any taxes paid on fictitious income as part of their loss, and their deductions are reduced by 10 percent of their adjusted gross income, plus a $100 deductible. Nonetheless, the memorandum lays out a way to greatly increase an investor’s overall deduction, which can be used to offset ordinary income in the current year, or carried back three years or forward 20 years.  The steps outlined in the memorandum “dramatically increase your theft-loss deduction,” Mr. Warhaftig said, because they allow inclusion not just of the principal but of all of the phantom interest and income over the years.  In general, the I.R.S. is loath to open the door to investors who might file amended returns, for fear of attracting hoards of aggressive tax-return preparers.  A third potential avenue of redress is the so-called claim of right rule, which is often contested by the I.R.S. This rule applies to investors who claim theft-loss deductions but cannot use them because they do not have enough ordinary income to offset the deduction. They can generally claim a refund, without interest, of the taxes paid on phantom income.  A version of this article appears in print on , on Page B4 of the New York edition with the headline: For Victims of Schemes, The I.R.S. Can Be Flexible. Order Reprints| Today's Paper|Subscribe
Under U.S. tax rules, investors may be able to seek redress from the federal government for losses stemming from the $50 billion Ponzi scheme that Bernard L. Madoff is suspected of orchestrating, tax experts say.