The IRS has issued rules which offer some relief for victims of the Bernard Madoff swindle and other like schemes. Although full recovery of losses isn't expected, taxpayers will be able to claim money lost as "theft losses" rather than regular investment losses. The rules apply to cases where the authorities have alleged fraud. Taxpayers can deduct 95% of their net investment minus any recoveries made through the other sources.
According to the commissioner "the investor generally can claim a theft loss deduction not only for the net amount invested, but also for the so-called “fictitious income” that the promoter of the scheme credited to the investor’s account and on which the investor reported as income on his or her tax returns for years prior to discovery of the theft."
Taxpayes will not be able to amend prior tax returns.
The Commissioner's comments which are on the web summarize the the rules here. The revenue ruling is available as well as the revenue procedure.