From your description I am assuming all of this fraud existed on IRA funds. As such the loss is a reduction of the IRA value. Put money into an IRA,  you get a deduction (at least partially) and the client needs to determine their non deductible IRA basis. When there is an IRA distribution, all (or some) of that distribution is taxable. I don't hear that there was a a distribution. Essentially the client bought some bogus scheme (in their IRA) and the value of their IRA declined $65,000 due to that bad investment. That just becomes part of the long story. 

For what year is IRS looking for tax? In 2017, did the $130,000 REALLY get rolled into an IRA? If NOT, then $130,000 less basis is taxable. If it was rolled over, then no tax until the distribution. The story, as you have written it is incomplete.