After posting on a couple of more messageboards, I received information from someone who claimed to have worked for the IRS. From information on his post, I looked up information on bad debts from the IRS site and this is what it says:
Topic 453 - Bad Debt Deduction

If someone owes you money that you cannot collect, you may have a bad debt. For a discussion of what constitutes a valid debt, refer to Publication 550, Investment Income and Expenses, and Publication 535, Business Expense. To deduct a bad debt, you must have previously included the amount in your income or loaned out your cash. If you are a cash basis taxpayer, as most individuals are, you may not take a bad debt deduction for income you expected to receive but did not because the amount was never included in your income. For a bad debt, you must show that there was an intention at the time of the transaction to make a loan and not a gift.

There are two kinds of bad debts  business and nonbusiness. A business bad debt, generally, is one that comes from operating your trade or business. A business deducts its bad debts from gross income when figuring its taxable income. Business bad debts may be deducted in part or in full.

All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt. You must establish that you have taken reasonable steps to collect the debt and the debt is worthless. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. A debt becomes worthless when the surrounding facts and circumstances indicate there is no longer any chance the amount owed will be paid. You do not have to wait until a debt is due to determine whether it is worthless.

A nonbusiness bad debt is reported as a shortÂterm capital loss in Part 1 on Form 1040, Schedule D (PDF). It would be subject to the capital loss limitations. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return.

For more information on nonbusiness bad debts, refer to Publication 550, Investment Income and Expenses. For more information on business bad debts, refer to Publication 535, Business Expenses.

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I'm going to use this route. At the very least, as coolvt indicated, it will make the IRS aware of this person and hopefully they will probe into his business.

even if you go this route, YOU won't get any money back from it. at most the contractor will have to show the money as income, and if he has already filed he may be fined for not reporting it.

I realize that I probably won't recover anything except maybe a tiny tax savings from writing off the bad debt -- but the contractor shouldn't get off completely free. Even if he only gets a fine from the IRS, perhaps he will think twice about pulling this stunt on someone else.

you could retaliate by informing the irs that he pays workers in his employ under the table. that means that income taxes and social security taxes are not being collected. i think the irs would be interested in that. this will not help you in collecting what you are entitled to but may prevent it happening to others.

haus, thanks for your reply. I'd just like my money back. The steps I'm going to follow are (1) file a complaint with our State Consumer Fraud Department -- our state has a good department for this and actually does follow up on complaints. (2) If that doesn't get me something back, I will then file with our BBB mediation department seeking mediation -- similar to Small Claims Court, but if I win and he doesn't make restitution, a mark against him stays on the BBB report for all to see and it may protect others from being flim-flammed. (3) If he still has not returned my money, I will then use the government write-off for Uncollectible Bad Debt form shown above accompanied by my records from the Department of Fraud and the BBB. Of course there is part of me that hopes the IRS goes after him and audits him but I guess I'll never know the outcome of that if it happens, so it isn't worth my energy thinking about it. Now, my husband and I have gone out and bought all new materials and are busy finishing the work ourselves. It is taking us about 10 times longer than it would take a pro, but it is looking beautiful. By the time we are finished, we will probably have spent no more on the job, even including the money we lost, than had we paid him the full amount for doing the work (the $1500 was only a deposit -- we were supposed to pay the rest when he finished the job -- HAH!!

If you really want to frost his cupcakes, notify Workman's Compensation. They make the IRS look like puppy dogs.
Ron

ron6519, I don't understand. How would it help me to go to Worker's Comp? I'll do it if it helps me recover something or if it helps to protect others, but if it is just for revenge forget it. I think this guy has the potential to be dangerous.

However, yesterday I was buying tile for the bathroom at the tile store where "the thief" also told me he purchases tile and I informed the owner about my episode. She was shocked and said she will be very careful about extending credit to him in the future. One for me.

In the meantime, our bathroom redo is coming along slowly. We are repairing the walls around our tub surround. My husband is doing all of the repair work and he has left me the task of plastering. I'm doing the best I can, but I'm not very good at this and fear the walls are not going to be nice and smooth when I am finished. One of the main reasons we hired "the thief" was for this very work because neither my husband and I are good at plastering. I keep practicing and am getting better at it, but it will never look like a professional job.

As a long time business owner, I too had my share of flacks that just looked for a chance to screw you.
Your case is a good example why you try to use a licensed contractor. 1, he has signed an agreement with your states licensing board stating that he will preform to a set of standards for the state that you live in. 2, When you go to small claimes court and win a judgement, you now send it to the state contractor's board that will then send this guy a 90-day notice that he has to get this resolved or his license will be revoked. 3, In your case this same judgement posted to/at most local suppliers will help stop the next person from being taken whether he's licensed or not, just like above when "She was shocked" if no one tells, no one knows and they go on taking $1,500 from 10 more jobs, & that is $15,000 a year tax free! Elden

You got all the right idea, including the Workman's Compensation ( smile).
If he is license you got better chance get your money and fairly quickly from his License Bond

If you have his license number you can find his Bond information on the state board web site under his license

Good luck

Thanks all for continuing support. We've moved ahead with our project - treated ourselves to a beautiful cobblestone-looking travertine floor tile which we finished installing yesterday (still need to grout and seal). Shower is done and looks gorgeous! We were most concerned about drywalling and plastering around shower -- our job was not 100% perfect but was pretty darned close to 99%!! We were going to buy a new vanitytop, but the @#%^&* contractor called a week ago and said he wanted to settle up and would bring the top over. Of course he never showed up. We didn't even get mad about this -- we were pretty sure he wouldn't come. We cleaned up the old one (dated cultured marble) but it is the same color as the travertine and is not scratched or damaged in any way so we will stick that back on till we decide on a top. We love the travertine so much that we are considering buying a few more sheets of that and making our own top. Now, we just have to decide which toilet to buy (contractor said he had already bought one for us and was supposed to bring it over with the vanitytop but.......oh well. Tomorrow I write my first letter to our state consumer fraud department. I think I said earlier that we don't expect to recover anything, but we can only hope to warn others about this guy. Hope you all had a great Thanksgiving.