Nearly three months into the Bernard Madoff scandal, the financier's investors are learning a tough lesson in financial management: Their best recourse may be asking for help from a tax accountant or lawyer – and forget about the federal government's anointed investor-protection group.

Mr. Madoff was arrested Dec. 11 and charged with defrauding thousands of investors of as much as $50 billion in what authorities say was the biggest Ponzi scheme in history. His clients included banks, hedge funds, charities, universities, and wealthy individuals.

The options for investors to recoup their losses are now shaping up. For some that means filing a lawsuit. Alan Cosner, an attorney in East Brunswick, N.J., and a former IRS agent, says he has fielded "daily" inquiries since he took out ads in the Palm Beach Post and elsewhere in late December seeking to attract investors burned by Madoff.

"I'd sue everybody, I'd sue the trust, I'd sue the feeder fund, for lack of due diligence," Mr. Cosner says.

But for now, the best option may involve taking advantage of the federal tax code.

"I've been telling people to renounce their claims," says Robert Willens, a tax attorney in New York. Closing out litigation and other investor-protection claims, he says, opens the door to a "theft-loss" deduction. This lets investors recoup the entire loss minus 10 percent of their gross adjusted income. "Otherwise you'll only get pennies on the dollar," says Mr. Willens.

The Internal Revenue Service allows investors to "carry back" losses against income reported on federal tax returns over the past three years. Those losses may also be carried forward for 20 years.

But one group of Madoff investors is pushing for more. Led by Howard Merson of Stowe, Vt., they are circulating a draft petition to Congress for "full restitution" of those implicated. They are seeking a five-year carry back, a deduction of losses against assets held in 401(k) and IRA accounts, and big changes to restitution rules at the Securities Investor Protection Corporation (SIPC).

Discovering just how strict SIPC rules are has been a disappointment for Madoff investors. Created by Congress in 1970, this nonprofit investor-protection group was designed to protect investors when a brokerage firm fails and cash and securities are missing from accounts.

Last month, the SIPC mailed out 8,000 claim forms to Madoff clients. But the number of people who lost money in the scam is probably far more. Some recipients represent pools of dozens or hundreds of investors – many of whom, though wealthy by national standards, now find themselves wiped out.

Initially, some Madoff clients had hoped to take advantage of SIPC guarantees of $400,000 in securities and $100,000 in cash in the event of a brokerage's failure. But owing to Byzantine rules of this congressionally chartered entity and the nature of the Madoff case, many have now concluded that they won't receive even that much.

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