Keep Your Eyes Peeled for These IRS Dirty Dozen Tax Scams
The IRS released its annual list of “Dirty Dozen” tax scams, which helps raise awareness to protect honest taxpayers from aggressive promoters and con artists. These schemes put people at financial risk and increase the chances people could become victims of identity theft. Many of these schemes peak during filing season as people prepare their tax returns. In reality, a tax scam can occur throughout the year as fraudsters look for ways to steal money, personal information, data, and more.
1. Employee Retention Credit claims
While many eligible employers claimed and have already received the Employee Retention Credit (ERC), some third parties continue to widely advertise their services targeting taxpayers who may not be eligible for the ERC. These advertisements, along with the increased prevalence of websites touting how easy it is to qualify for the ERC, lend an air of legitimacy to abusive claims for refunds.
The IRS has been warning about this scheme since last fall, but there continue to be attempts to claim the ERC during the 2023 tax filing season.
Third party promoters of the ERC often don’t accurately explain eligibility for and computation of the credit. They may make broad arguments suggesting that all employers are eligible without evaluating an employer’s individual circumstances. For example, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021, but these third-party promoters fail to explain this limitation. In addition, some third parties do not inform employers that they cannot claim the ERC on wages that were reported as payroll costs in obtaining Paycheck Protection Program loan forgiveness.
Some of these advertisements exist solely to collect the taxpayer’s personally identifiable information in exchange for false promises. The scammers then use the information to conduct identity theft.
The IRS reminds all taxpayers that the willful filing of false information and fraudulent tax forms can lead to serious civil and criminal penalties.
2. Phishing and smishing
Taxpayers should be alert to fake communications posing as legitimate organizations in the tax and financial community, including the IRS and states. These messages arrive in the form of an unsolicited text or email to lure unsuspecting victims to provide valuable personal and financial information that can lead to identity theft. There are two main types of communication:
- Phishing is an email sent by fraudsters claiming to come from the IRS or another legitimate organization, including state tax organizations or a financial firm. The email lures the victims into the scam through a variety of ruses such as enticing victims with a phony tax refund or frightening them with false legal/criminal charges for tax fraud.
- Smishing is a text or smartphone SMS message that uses the same technique as phishing. Scammers often use alarming language like, “Your account has now been put on hold,” or “Unusual Activity Report” with a bogus “Solutions” link to restore the recipient’s account. Unexpected tax refunds are another potential target for scam artists.
The IRS initiates most contacts through regular mail and will never initiate contact with taxpayers by email, text, or social media regarding a bill or tax refund.
Never click on any unsolicited communication claiming to be the IRS as it may surreptitiously load malware. It may also be a way for malicious hackers to load ransomware that keeps the legitimate user from accessing their system and files.
The IRS also warns taxpayers to be wary of messages that appear to be from friends or family but that are possibly stolen or compromised email or text accounts from someone they know. This remains a popular way to target individuals for a variety of scams. Individuals should verify the identity of the sender by using another communication method; for instance, calling a number they independently know to be accurate, not the number provided in the email or text.
Individuals should never respond to tax-related phishing or smishing or click on the URL link. Instead, the scams should be reported by sending the email or a copy of the text/SMS as an attachment to email@example.com. The report should include the caller ID (email or phone number), date, time and time zone, and the number that received the message.
Taxpayers can also report scams to the Treasury Inspector General for Tax Administration or the Internet Crime Complaint Center. The Report Phishing and Online Scams page at IRS.gov provides complete details. The Federal Communications Commission’s Smartphone Security Checker is a useful tool against mobile security threats.
3. IRS online account help from third-party scammers
In this scam targeting individuals, swindlers pose as a “helpful” third party and offer to help create a taxpayer’s IRS Online Account at IRS.gov. People should remember they can set these accounts up themselves. Third parties making these offers will try to steal a taxpayer’s personal information this way. Taxpayers can and should establish their own Online Account through IRS.gov.
These scammers often ask for the taxpayer’s personal information including address, Social Security number or Individual Taxpayer Identification number (ITIN), and photo identification. The criminal then sells this valuable information to other criminals. They can also use the sensitive information to file fraudulent tax returns, obtain loans, and open credit accounts.
The IRS urges people to watch out for these “helpful” criminals. The only place individuals should go to create an IRS Online Account is IRS.gov. People should not use third-party assistance, other than the approved IRS authentication process through IRS.gov, to create their own IRS online account.
4. Third-party promoters for the Fuel Tax Credit
The fuel tax credit is meant for off-highway business and farming use and, as such, is not available to most taxpayers. However, promoters are enticing taxpayers to inflate their refunds by erroneously claiming the credit. The IRS has seen an increase in the promotion of filing certain refundable credits using Form 4136, Credit for Federal Tax Paid on Fuels.
In this scam, a third party convinces a taxpayer to fraudulently claim the credit with promises of a windfall refund. The promoters are focused on their own gain, taking advantage of the taxpayer with inflated fees, refund fraud, and identity theft.
Taxpayers contemplating participating in any questionable tax scheme such as this should be aware the IRS has increased its compliance efforts related to falsely claiming these credits. IRS processing systems, including new identity theft screening filters, are now stopping a significant number of suspicious fuel tax credit refund claims.
Before taking the bait on a dubious credit claim, taxpayers should seek advice from a legitimate source. Returns filed by individuals and tax preparers who knowingly claim a credit to which they are not entitled may face fines and even be subject to federal criminal prosecution and imprisonment.
5. Fake charities
Bogus charities are a perennial problem that gets bigger whenever a crisis or natural disaster strikes. Scammers set up these fake organizations to take advantage of the public’s generosity. They seek money and personal information, which can be used to further exploit victims through identity theft.
Taxpayers who give money or goods to a charity might be able to claim a deduction on their federal tax return if they itemize deductions, but charitable donations only count if they go to a qualified tax-exempt organization recognized by the IRS.
Fake charity promoters may use emails to solicit donations or alter or “spoof” their caller ID to make it look like a real charity is calling on the phone. They often target seniors and groups with limited English proficiency.
Here are some tips to protect against fake charity scams:
- Don’t give in to pressure. Scammers often use a tactic focused on an urgent need to pressure people into making an immediate payment. Legitimate charities are happy to get a donation at any time. Donors are encouraged to take time to do their own research.
- Verify first. Scammers frequently use names that sound like well-known charities to confuse people. Potential donors should ask the fundraiser for the charity’s exact name, website, and mailing address so they can independently confirm it.
- Be wary about how a donation is requested. Taxpayers should never work with charities that ask for donations by giving numbers from a gift card or by wiring money. That’s a scam. It’s safest to pay by credit card or check after verifying the charity is real.
- Don’t give more than needed. Scammers are on the hunt for both money and personal information. Taxpayers should treat personal information like cash and not hand it out to just anyone. They should never give out Social Security numbers, credit card numbers, or PIN numbers, and they should give bank or credit card numbers only after they’ve confirmed the charity is real.
6. Unscrupulous tax preparers
Taxpayers should choose a tax preparer as carefully as they choose a doctor or lawyer. After all, the tax preparer is entrusted with sensitive personal and financial information. While there are different types of tax preparers with varying levels of credentials and qualifications, there are constants when it comes to finding a preparer:
- A taxpayer’s individual needs will determine which kind of preparer is best for them.
- Taxpayers are ultimately responsible for all the information on their income tax return, regardless of who prepares the return.
- Tax professionals are required to have an IRS Preparer Tax Identification Number (PTIN) to prepare federal tax returns.
The IRS offers resources for taxpayers to educate themselves on types of preparers, representation rights, as well as a Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. This directory can help taxpayers find a return preparer with specific qualifications to fit their needs. The directory is searchable and sortable.
Most tax return preparers provide outstanding and professional service. Unfortunately, there are also some unethical tax preparers that should be avoided at all costs.
A major red flag or bad sign is when the tax preparer is unwilling to sign the dotted line. Avoid these “ghost” preparers, who will prepare a tax return but refuse to sign or include their IRS Preparer Tax Identification Number (PTIN) as required by law.
Not signing the return could mean the preparer may be looking to make a quick profit by promising a big refund or charging fees based on the size of the refund. This leaves the taxpayer vulnerable and on the hook for any misinformation on the return. Taxpayers should never sign a blank or incomplete return.
Shady tax preparers may:
- Ask for a cash only payment without providing a receipt.
- Invent false income to try to get their clients more tax credits.
- Claim fake deductions to boost the size of the refund.
- Direct refunds into their bank account, not the taxpayer’s account.
Taxpayers can report preparer misconduct to the IRS using Form 14157, Complaint: Tax Return Preparer. If a taxpayer suspects a tax return preparer filed or changed their tax return without their consent, they should file Form 14157-A, Tax Return Preparer Fraud or Misconduct Affidavit.
7. Fraudulent form filing and bad advice from social media
The IRS warns taxpayers to be wary of trusting internet advice, whether it’s a fraudulent tactic promoted by scammers or it’s patently false tax-related scheme trending across popular social media platforms.
The IRS is aware of various filing season hashtags and social media topics leading to inaccurate and potentially fraudulent information. The central theme involves people trying to use legitimate tax forms for the wrong reason. Here are just two of the recent schemes circulating online:
Form 8944 fraud
A recent example of bad advice circulating on social media that could lead to fraudulent form filing involves Form 8944, Preparer e-file Hardship Waiver Request. There are wildly inaccurate suggestions being made about this form. Posts claim that Form 8944 can be used by taxpayers to receive a refund from the IRS, even if the taxpayer has a balance due. This is false information. Form 8944 is for tax professional use only.
While Form 8944 is a legitimate IRS tax form, it’s intended for a targeted group of tax return preparers who are requesting a waiver so they can file tax returns on paper instead of electronically. It is not in any way a form the average taxpayer can use to avoid tax bills.
Form W-2 fraud
This scheme circulating on social media encourages people to use tax software to manually fill out Form W-2, Wage and Tax Statement, and include false income information. In this W-2 scheme, scam artists suggest people make up large income and withholding figures as well as the employer it’s coming from. Scam artists then instruct people to file the bogus tax return electronically in hopes of getting a substantial refund.
The IRS, along with the Security Summit partners in the tax industry and the states, are actively watching for this scheme. In addition, the IRS works with payroll companies, large employers, and the Social Security Administration to verify W-2 information.
The IRS and Summit partners warn people not to fall for this scam. Taxpayers who knowingly file fraudulent tax returns potentially face significant civil and criminal penalties.
Phishing is a term given to emails or text messages designed to get users to provide personal information, either directly or by clicking on a link or attachment. Spearphishing is a tailored phishing attempt at a specific organization or business.
The IRS is warning tax professionals about spearphishing because there is greater potential for harm if the tax preparer has a data breach. A successful spearphishing attack can ultimately steal client data and the tax preparer’s identity, allowing the thief to file fraudulent returns.
A taxpayer becoming a victim of tax-related identity theft is certainly an issue with spearphishing, but criminals seeking tax preparer credentials or access to their client’s tax-related information increases the potential number of victims.
Spearphishing begins with a suspicious email – one that may appear as a tax preparation application or another e-service or platform. Some scammers will even use the IRS logo and claim something like “Action Required: Your account has now been put on hold.” Often these emails stress urgency and will ask tax pros or businesses to click on links to input or verify information.
The IRS wants to warn businesses about another specific spearphishing scam that targets employees in payroll or accounting departments. These employees might get an email that looks like it comes from an official source requesting W-2s for all employees. The payroll department might accidentally reply with these important documents, which would provide scammers with W-2 data on employees that can be used to commit fraud.
The IRS recommends using a two-person review process when receiving these types of requests for W-2s. The IRS also recommends any requests for payroll be submitted through an official process, like the employer’s Human Resources portal.
How to side-step spearphishing:
- Never click suspicious links.
- Double check the requests with the original sender.
- Be vigilant year-round, not just during filing season.
9. Offer in Compromise mills
An Offer in Compromise (OIC) is when the taxpayer works with the IRS to settle a tax debt for less than the full amount owed. It is an option for those unable to pay the full tax liability or if doing so creates a financial hardship. The IRS takes into consideration each unique set of facts and circumstances. This agreement can happen directly between the taxpayer and the IRS without a third party.
An Offer in Compromise “mill” will usually make outlandish claims, frequently in radio and TV ads, about how they can settle a person’s tax debt for cheap. In reality, the promoter fees are often excessive, and taxpayers pay the OIC mill to get the same deal they could have received on their own by working directly with the IRS. This takes unnecessary money out of the taxpayer’s wallet.
In addition, not every taxpayer will qualify for an OIC. Some promoters knowingly advise indebted taxpayers to file an OIC application even though the promoters know the person will not qualify, costing honest taxpayers money and time.
The IRS urges people to take a few minutes to review information on IRS.gov to see if they might be a good candidate for the OIC program and avoid costly promoters. As a first step, a taxpayer can check their OIC eligibility for free using the IRS’s Offer in Compromise Pre-Qualifier tool. The IRS reminds taxpayers about the First Time Penalty Abatement policy, where taxpayers can go directly to the IRS for administrative relief from a penalty that would otherwise be added to their tax debt.
10. Schemes aimed at high-income filers
Charitable Remainder Annuity Trust (CRAT)
Charitable Remainder Trusts are irrevocable trusts that let individuals donate assets to charity and draw annual income for life or for a specific time period. The IRS examines charitable remainder trusts to ensure they correctly report trust income and distributions to beneficiaries, file required tax documents, and follow applicable laws and rules. A charitable remainder annuity trust (CRAT) pays a specific dollar amount each year.
These trusts are sometimes misused by promoters, advisors, and taxpayers to try to eliminate ordinary income and/or capital gain on the sale of property. In abusive transactions of this type, property with a fair market value in excess of its basis is transferred to a CRAT. Taxpayers may wrongly claim the transfer of the property to the CRAT results in an increase in basis to fair market value as if the property had been sold to the trust. The CRAT then sells the property but does not recognize gain due to the claimed step-up in basis. Next, the CRAT purchases a single premium immediate annuity (SPIA) with the proceeds from the sale of the property.
By misapplying the rules under sections 72 and 664, the taxpayer, or beneficiary, treats the remaining payment as an excluded portion representing a return of investment for which no tax is due.
The IRS reminds taxpayers that they are legally responsible for what is on their tax return, not the practitioner or promoter who entices them to sign on to an abusive transaction.
Monetized Installment Sales
In these potentially abusive transactions, promoters find taxpayers seeking to defer the recognition of gain upon the sale of appreciated property. They facilitate a purported monetized installment sale for the taxpayer in exchange for a fee. These installment sales occur when an intermediary purchases appreciated property from a seller in exchange for an installment note. The notes typically provide for payments of interest only, with the principal being paid at the end of the term. In these arrangements, the seller gets the lion’s share of the proceeds, but improperly delays the recognition of gain on the appreciated property until the final payment on the installment note, often years later.
Where appropriate, the IRS may assert accuracy-related penalties ranging from 20% to 40% of an underpayment of tax, or a civil fraud penalty of 75% of any underpayment of tax related to transactions like those listed here. However, this is not an exclusive list of transactions the IRS is scrutinizing, and taxpayers and practitioners should always be wary of participating in transactions that seem “too good to be true.”
11. Bogus tax avoidance strategies
Micro-captive insurance arrangements
Also called a small captive, a micro-captive is an insurance company whose owners elect to be taxed on the captive’s investment income only. Abusive micro-captives involve schemes that lack many of the attributes of legitimate insurance. These structures often include implausible risks, failure to match genuine business needs, and in many cases, unnecessary duplication of the taxpayer’s commercial coverages. In addition, the “premiums” paid under these arrangements are often excessive, reflecting non-arm’s length pricing.
Syndicated conservation easements
A conservation easement is a restriction on the use of real property. Generally, taxpayers may claim a charitable contribution deduction for the fair market value of a conservation easement transferred to a charity if the transfer meets the requirements of Internal Revenue Code section 170.
In abusive arrangements, promoters are syndicating conservation easement transactions that purport to give an investor the opportunity to claim charitable contribution deductions and corresponding tax savings that significantly exceed the amount the investor invested. These abusive arrangements, which generate high fees for promoters, attempt to game the tax system with grossly inflated tax deductions.
As part of the Consolidated Appropriations Act of 2023, Congress amended section 170 to curb certain abusive conservation easement transactions.
12. Schemes with international elements
Offshore accounts & digital assets
International tax compliance remains a high priority for the IRS. The IRS continues to scrutinize taxpayers attempting to hide assets in offshore accounts and accounts holding digital assets, such as cryptocurrency. The IRS reminds U.S. persons that they are taxable on their worldwide income, unless they can establish there is a statutory or treaty exemption.
The IRS scrutinizes structured transactions, private annuities, employee leasing schemes, foreign trusts, the use of nominee ownership, and other arrangements used to conceal taxable income, beneficial owners, and assets. To complement its enforcement investigations, the IRS requires individuals holding foreign assets and third parties to report to the IRS on foreign assets, foreign accounts, foreign entities, and digital assets. Reporting requirements carry penalties for failure to file.
Asset protection professionals and unscrupulous promoters continue to lure U.S. persons into placing their assets in offshore accounts and structures, saying they are out of reach of the IRS. Similarly, unscrupulous promoters recommend digital assets as being untraceable and undiscoverable by the IRS. These assertions are not true. The IRS can identify and track anonymous transactions of foreign financial accounts as well as digital assets.
Maltese individual retirement arrangements misusing treaty
These arrangements involve U.S. citizens or residents who attempt to avoid U.S. tax by contributing to foreign individual retirement arrangements in Malta (or potentially other host countries). The participants in these transactions typically lack any local connection to the host country, and unlike U.S. law for individual retirement arrangements, the host country’s laws allow for contributions in a form other than cash and do not limit the number of contributions by reference to employment or self-employment activities. By improperly asserting the foreign arrangement as a “pension fund” for U.S. tax treaty purposes, the U.S. taxpayer misconstrues the relevant treaty provisions and improperly claims an exemption from U.S. income tax on gains and earnings in, and distributions from, the foreign individual retirement arrangement.
Puerto Rican and other foreign captive insurance
In these transactions, U.S. business owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation in which the U.S. business owner has a financial interest. The U.S. business owner (or a related entity) claims a deduction for amounts paid as premiums for “insurance coverage” provided by a fronting carrier, which reinsures the “coverage” with the Puerto Rican or other foreign corporation. Despite being labeled as insurance, these arrangements lack many of the attributes of legitimate insurance. The characteristics of the purported insurance arrangements typically will include one or more of the following: implausible risks covered (or duplicative coverage of risks already covered by commercial insurance), excessive premiums indicative of non-arm’s length pricing, and a lack of business purpose for entering the arrangement.
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