New York – The Internal Revenue Service has begun to send refund checks to Madoff investors who paid taxes on money they thought they had made before the massive fraud was revealed.

An early trickle of refunds includes checks for substantial amounts, nearly half a million dollars in some cases. The very biggest sums haven’t materialized, however, according to certified public accountants. By some estimates, these could be for tens of millions of dollars.

A handful of clients of Robert S. Keebler, a partner at accounting firm Baker Tilly Virchow Krause LLP in Appleton, Wis., have gotten refunds after filing amended returns since the Madoff scheme came to light.

“Most are still in process,” says Mr. Keebler. Some of his clients are expecting checks “in the millions,” he says, while refunds already received include sums of up to half a million dollars.

Accountant David R. Selznick of the Armonk, N.Y., accounting firm Selznick & Co. says one of his clients also received a refund for around $500,000. The firm is handling six Madoff-related cases. It still hasn’t filed a return for one victim that could yield the biggest refund, involving a $20 million theft loss due to investments through Bernard Madoff.

Two small-business clients of Mr. Selznick’s were denied refunds, and the accountant is in talks now with the IRS about the cases. Mr. Selznick believes that the agency miscalculated some figures associated with the businesses, and he hopes it will reverse the decision in the next few months.

All of Mr. Selznick’s clients filed for refunds on their 2008 returns, using a special IRS rule for Ponzi-scheme losses. The Madoff-related tax refunds are arriving after a lot of uncertainty over how the IRS would handle returns filed by burned investors. Tax advisers clashed over how best to retrieve money for clients as the scandal emerged. Some urged people to file amended returns, while others counseled them to hold off.

In March the IRS set the stage for large refunds with a generous reading of rules that let investors take a theft loss on their 2008 tax returns.

Those suing third parties get less-generous treatment because they have a better prospect of recovering money.

(Source: Wall Street Journal)