What happens to unpaid embezzled funds if they are returned to the original owner?

The treatment of unpaid embezzled funds returned to the original owner is that they can be treated as a loan. When an individual embezzles funds, it is initially taxed as income to the embezzler in the year the funds were taken. However, if these funds are returned, they can be viewed as a form of repayment for a debt.

In this situation, the embezzler can report the return of embezzled funds without being taxed on that amount again, as it is seen as giving back what was wrongfully taken, similar to repaying a loan. This perspective is supported by the principle that income is taxable when received, but if it is returned, it does not count again as taxable income.

The other choices do not adequately reflect the tax implications of returned embezzled funds. For instance, treating them as taxable income would not apply since the return nullifies the gain for the embezzler. Deductible expenses and gifts are also inappropriate classifications in this context, as they do not capture the nature of the transaction involved in returning embezzled funds.