For more than 20 years, the IRS has published an annual list of its “Dirty Dozen” tax scams and potentially abusive tax avoidance arrangements. The primary purpose of the list is to raise awareness and warn taxpayers. According to the IRS, “Taxpayers should stop and think twice before including these questionable arrangements on their tax returns. Taxpayers are legally responsible for what’s on their return, not a promoter making promises and charging high fees. Taxpayers can help stop these arrangements by relying on reputable tax professionals they know they can trust.”
1. Employee Retention Credit (ERC) Claims
This is the strongest rebuke of ERC mills and fraudulent claims that we have seen to date. Aggressive promoters have been blasting ads on radio and the internet offering refunds involving ERC, sometimes based on inaccurate information related to eligibility for and computation of the credit. There are very specific guidelines for the ERC claims and the IRS is actively auditing and conducting criminal investigations related to false claims.
Taxpayers filing ERC claims are ultimately responsible for the accuracy of the information on their tax return. The IRS Small Business/Self-Employed division has trained auditors for ERC examination, and the IRS Criminal Investigation Division is on the lookout for promoters of fraudulent claims. Taxpayers must be aware that willful filing of false information and fraudulent tax forms can lead to serious civil and criminal penalties.
The IRS encourages the tax professional community to continue to advise clients not to file ERC claims when the tax professional believes they do not qualify. Indeed, recently the IRS alerted that “If a practitioner cannot reasonably conclude that the client is or was eligible to claim the ERC, then the practitioner should not prepare an original or amended return that claims or perpetuates a potentially improper credit”.
2. Tricking Emails and Text Messages During Filing Season
As in past years, the IRS warns again about phishing and smishing schemes where cybercriminals try to steal a taxpayer’s information through scam emails or text messages, especially during filing season. Scammers will regularly pose as the IRS, a state tax agency, or others in the tax industry. There are two main types of schemes: (A) Phishing: Email claiming to come from the IRS or another legitimate organization, luring the victims into the scam by a variety of ruses, such as enticing victims with a phony or unexpected tax refund or frightening them with false legal/criminal charges for tax fraud; and (B) Smishing: Text using the same techniques mentioned above with 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. 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.
3. “Help” to Set Up an IRS Online Account
In this scam targeting individuals, scammers pose as a “helpful” third party to create a taxpayer’s IRS Online Account at IRS.gov. They often ask for the taxpayer’s personal information including address, SSN or ITIN, and photo identification, which they sell or use to file fraudulent tax returns, obtain loans, and open credit accounts. The IRS alerts that 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 of False Fuel Tax Credit Claims
The fuel tax credit is not available to most taxpayers. It is limited to activities like off-highway business usage, agriculture and farming, and boats and buses. In this scam, a third party convinces a taxpayer to fraudulently claim the credit with promises of a windfall refund, taking advantage of the taxpayer with inflated fees, refund fraud, and identity theft. The IRS advises that it has increased its compliance efforts through its processing systems, including new identity theft screening filters. 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 to Exploit Taxpayers Following Natural Disasters
In this scam, criminals set up fake organizations to take advantage of the public’s generosity, seeking money and personal information, which can be used to further exploit victims through identity theft. Fake charity promoters may use emails to solicit donations or alter their caller ID to make it look like a real charity is calling on the phone, often targeting seniors and groups with limited English proficiency. The IRS warns that deductible charitable donations only count if they go to a qualified tax-exempt organization recognized by the IRS.
6. Shady Tax Preparers
The IRS warns of unscrupulous tax preparers by giving several examples of red flag practices, such as: (A) charging a fee based on the size of a refund, (B) “ghosting” their clients after bad advice, (C) refusing to sign tax returns or provide their PTIN, (D) asking to sign a blank return, (E) asking for a cash only payment without providing a receipt, (F) inventing false income to get more tax credits, (G) claiming fake deductions to boost a refund, or (H) directing refunds into their bank account. Taxpayers are ultimately responsible for all the information on their income tax return, regardless of who prepares the return.
7. Schemes Circulating in Social Media
The IRS is warning of filing season hashtags and social media topics leading to inaccurate and potentially fraudulent form filing by taxpayers. Two recent schemes circulating online are: (A) Form 8944 fraud, in which posts claim that the form can be used by taxpayers to receive a refund—even if the taxpayer has a balance due—yet the form is for tax professional use only; and (B) Form W-2 fraud, in which people are encouraged to use tax software to manually fill out a Form W-2, include false income information, make up income, withholding amounts, and a false employer, and then electronically file the bogus tax return in hopes of a refund.
Spearphishing is a phishing attempt tailored to a specific organization or business. Usually, it begins with a suspicious email—one that may appear as a tax preparation application or another e-service or platform, or even one with the IRS logo using a variety of subject lines like “Action Required: Your account has now been put on hold.” Latest spearphishing attempts involve scams targeting tax professionals (new client impersonations, where if the tax preparer responds, the scammer sends a malicious attachment or URL that ultimately enables them to gain access to sensitive client information on the tax preparer’s computer systems) and businesses (specifically employees in payroll or accounting departments and requesting W-2s).
9. Third-party Services to Settle IRS Debts: Offer in Compromise (OIC) “mills”
An OIC is when the taxpayer settles a tax debt with the IRS for less than the full amount owed. In these situations, the IRS considers specific facts and circumstances and no third parties are required to reach such an agreement with the IRS. An OIC “mill” will usually make claims about how they can settle a person’s tax debt. However, the promoter fees are often excessive and taxpayers pay the OIC mill to get the same deal they could have received on their own. In addition, not every taxpayer qualifies for an OIC.
10. Schemes Aimed at High-Income Filers
- Charitable Remainder Annuity Trust (CRAT)
- Monetized Installment Sales
These schemes were detailed in the 2022 list. Learn more about these here.
11. Abusive Tax Avoidance Schemes
- Micro-Captive Insurance Arrangements
- Syndicated Conservation Easements
- Offshore Accounts & Digital Assets
- Maltese Individual Retirement Arrangements Misusing Treaty
- Puerto Rican and other Foreign Captive Insurance
These schemes were detailed in the 2022 list. Learn more about these here.
12. Overview and Reminder Warning
In conclusion, the IRS provides an overview of all of the schemes addressed above, but highlights the importance of taxpayers staying diligent throughout the year against these scams and others, not just during filing season.
What to do now
Taxpayers who are considering any of these abusive transactions or tax scams should carefully consider the potential consequences and consult independent, competent tax advisors before they make what could be a big and costly mistake. They may not be able to claim the purported tax benefits on a tax return. Taxpayers who have already claimed tax benefits for any of the abusive transactions described above should consider taking corrective steps, such as filing an amended return and seeking professional advice because the IRS is very likely to challenge these arrangements. Besides having to repay the tax benefits claimed (plus interest), the IRS may assert accuracy-related penalties ranging from 20% to 40% of the underpaid tax, or a civil fraud penalty of 75% of the underpayment.
Contact our team for help or more information.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.