Tax season is upon us, and as a result things are getting busier for taxpayers. Unfortunately, with tax season comes different types of scams. Thankfully, the IRS compiles an annual list of scams to avoid called the “dirty dozen.” This is a list of scams that the IRS considers to be the worst of the worst and urges taxpayers to avoid them at all costs. This post will discuss the scams on this year’s list with some tips on how to identify them. We will continue to update this post as the IRS finishes the list.
1. Employee Retention Credit Claims
The first of the dirty dozen the IRS highlights are scams related employee retention credit (ERC) claims. Employee retention credits are a tax credit that is given to businesses that continued to pay employees after shutting down due to the pandemic. This scam is when promoters attempt to convince ineligible people to claim the credit. They highlight several cases in which promoters played advertisements on the radio or on the internet that promotes refunds with ERC.
IRS Commissioner Danny Werfel states: “The aggressive marketing of these credits is deeply troubling and a major concern for the IRS. “Businesses need to think twice before filing a claim for these credits. While the credit has provided a financial lifeline to millions of businesses, there are promoters misleading people and businesses into thinking they can claim these credits. There are very specific guidelines around these pandemic-era credits; they are not available to just anyone. People should remember the IRS is actively auditing and conducting criminal investigations related to these false claims. We urge honest taxpayers not to be caught up in these schemes.”
This tax credit is very specific for certain businesses, so businesses that claim it should be certain that they are eligible for it. The IRS has stated that they will step up enforcement regarding false claims. Both businesses claiming them, as well as those promoting them will need to be careful moving forward.
2. Phishing Scams
The next type of scam the IRS warns about is those sent through email or text. Phishing and smishing are the two types of scams the IRS urges you to avoid getting “hooked” by. Phishing is when an email is sent by a fraudster claiming to be the IRS. The email tricks the user into sending information or doing some task under the threat of criminal charges for tax fraud. Smishing is similar to phishing in that fraudsters try to get information by posing as the IRS. The only difference is that smishing is sent via text messages as opposed to email.
The IRS states that they initiate most contact through traditional mail. They will never contact you via email regarding a bill or tax refund, so should you receive such phone calls or emails, know that it is likely a scam.
3. Online Account Creation
The third scam highlighted on this year’s dirty dozen is online account creation scams. This scam involves scammers trying to sell or offer help to individuals with creating an IRS.gov account. This puts the individual’s tax information at risk of being compromised and can lead to identity theft. Scammers do this in order to attempt to claim tax returns using another individual’s information.
IRS Commissioner Danny Werfel says: “Scammers are coming up with new ways all the time to try to steal information from taxpayers. An Online Account at IRS.gov can help taxpayers view important details about their tax situation. But scammers are trying to convince people they need help setting up an account. In reality, no help is needed. This is just a scam to obtain valuable and sensitive tax information that scammers will use to try stealing a refund. People should be wary and avoid sharing sensitive personal data over the phone, email or social media to avoid getting caught up in these scams.”
Taxpayers can avoid this scam by creating an account on IRS.gov by themselves. If help is needed, be sure to get help from someone you know and trust.
4. False Fuel Tax Credit Claims
Next on the dirty dozen is another scam involving falsely claiming a type of tax credit. This scam involves falsely claiming fuel tax credits. Fuel tax credits are a type of tax credit available mainly to off-highway businesses or farming use. Most taxpayers are not eligible for this tax credit. Similar to other false tax credit claims, however, promoters will tell taxpayers that they are eligible for this credit.
Danny Werfel states that: “People should watch out for erroneous fuel tax credit claims and the scammers that promote them,” said IRS Commissioner Danny Werfel. “These scammers will often charge a hefty fee for these bogus claims, and participants also face the possibility of identity theft. This is another example that people should always remember: Be wary if a tax deal sounds too good to be true.”
Just like other tax credit scams, the easiest way to avoid them is to be certain you are eligible for a specific tax credit. Proper research into the credit can help you easily avoid falling victim to this scam.
5. Fake Charities
Fake charities are unfortunately not a new concept. Oftentimes, taxpayers are tricked into this scam following emergency situations or disasters. Fake charity scams are exactly what they sound like. Scammers create fake organizations that claim to do charity work, but are really designed to profit the scammer. Fake charity scammers attempt to take advantage of good-natured individuals.
If you’re someone who often donates to charity, you should be extra careful not to fall for these scams. Here is a list of tips the IRS suggests you follow to avoid being taken advantage of:
- 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; so, people should feel no rush. 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 — and only 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. Shady Tax Preparers
The sixth scam on the dirty dozen involves shady tax preparers. Tax preparation is something many will seek for each tax season. Taxes can be complicated, so having a preparer can prove to be very beneficial. Unfortunately, there are some individuals that claim to be tax preparers and end up scamming taxpayers out of their money. The most common way this is done is by “ghosting” taxpayers. Shady tax preparers will charge a fee up front and then ghost taxpayers before they sign their tax return.
One way to avoid shady tax preparers is to first look at their credentials. No two tax preparers are the same, and many will have varying levels of experience or credentials. Some things to keep in mind are knowing what your individual interests are. This will assist you in finding the right tax preparer. Also keep in mind that tax professionals are legally required to have an IRS Preparer Tax Identification Number (PTIN) in order to prepare tax returns.
A good way you can avoid getting ghosted by shady tax preparers is to look out for those who refuse to include their PTIN, or sign your tax return. This is a major red flag and is something scammers will often do. Some other things shady tax preparers might do are:
- Asking for cash only payments without a receipt.
- Inventing false income in order to get more credits for their client.
- Claiming fake deductions in order to increase the size of the refund.
- Directing funds into their bank accounts and not the taxpayer’s.
If you suspect a tax preparer of being a scammer, or fell victim to one, you can report them to the IRS with Form 14157, Complaint: Tax Return Preparer. If you suspect that a preparer filed or changed a return without your consent, you should file Form 14157-A, Tax Return Preparer Fraud or Misconduct Affidavit.
7. Social Media Tax Advice
Next on the dirty dozen are tax scams spread via social media. This is a new type of scam the IRS has identified. These scams vary in nature, but they all involve some type of advice being given to taxpayers about how to file taxes. The advice given is often false and can result in the individual who falls for them getting into serious trouble with the IRS. Social media has many benefits, but there are unfortunately those who enjoy spreading misinformation, or those who mistakenly believe what they’re promoting.
Some of the most recent examples of social media advice leading to false tax returns were the Form 8944 fraud, and the fake W-2 wages. Form 8944 is a form that is intented to be used by tax preparers who are requesting a waiver to file tax returns on paper instead of electronically. The Form 8944 fraud involved individuals who were not tax preparers filing it. The W-2 scams, which we have spoken about previously, encouraged people to make up large sums on their W-2 forms in order to receive a larger tax refund.
The best way to avoid these types of scams is to simply not take tax advice from social media. If you choose to do so, be sure the individuals spreading this information are trustworthy and know what they’re talking about. The safest way to receive tax advice is from the IRS directly, or from tax professionals.
Phishing was a type of scam already featured in the dirty dozen this year, but there’s another type of phishing that is referred to as “spearphishing.” While phishing is the act of fraudsters sending emails impersonating someone else to get information, spearphishing is when this phishing attempt is targeted towards a specific organization or business. Just like phishing, spearphishing will often begin with a suspicious email seemingly from the IRS, and tax professional, or organization. Remember, the IRS does not ask for information regarding bills or refunds via email, so emails claiming this should be discarded immediately.
Here are some other ways to avoid spearphishing against your organization:
- Avoid clicking on suspicious links.
- Double check any requests with the original sender.
- Be vigilant year-round, not just during tax season.
Another type of specific spearphishing attack is against business employees who work in payroll or accounting. These emails requests W-2s for all of the organization’s employees. If this information is provided, scammers now have access to employees’ W-2 information, which can be used to commit fraud. A two-person review process can be employed to prevent such scams from occurring.
9. Compromise Mills
This dirty dozen comes in the form of offers in compromise mills. Offer in compromise mills are a program designed to help people who can’t afford to pay to settle their federal tax debts. There are unfortunately mills that aggressively and misleadingly promote offers in compromise to people who don’t meet the qualifications. Taxpayers can avoid these scams by checking if they are actually eligible. The IRS has a handy tool that allows you to do just this.
10. Schemes Aimed at High-Income Filers
The most recent (as of 3/31/2023) dirty dozen is schemes that target high-income filers. These scams specifically target wealthy taxpayers with a number of strategies to take advantage of them. One such method is the use of Charitable Remainder Annuity Trusts (CRAT). CRATs are a type of irrevocable trust that lets individuals donate assets to charity and draw annual income for life or a specific time period. These trusts often get misused by promoters who get wealthy taxpayers to use CRATs with the sale of a property. The IRS warns taxpayers that they are responsible for what is on their returns, and not the ones who got them to sign up for a potentially abusive transaction.
Monetized Installment Sales are another potentially abusive transaction that takes advantage of high-income filers. Promoters of this scam look for taxpayers hoping to defer the recognition of gain upon the sale of unappreciated property. The IRS states that many of these scams come in the form of online advertisements. In order to avoid them, taxpayers should carefully review the legal requirements underlying these arrangements.
11. Bogus Tax Avoidance Schemes
Bogus tax avoidance schemes fall under two categories. Micro-captive insurance arrangements and syndicated conservation easements. A micro-captive is a type of insurance company in which the owners decide to be taxed only on the captive’s investment income. These relationships can be abusive, and those that are often have similar characteristics. These often include the following:
- Implausible risks
- Failure to match genuine business needs
- Unnecessary duplication of the taxpayer’s commercial coverage
Conservation easements are a restriction on how real property is used. Taxpayers are usually able to claim a charitable contribution deduction for fair market value of a conservation easement transferred to a charity (this transfer must meet the IRS requirements). These are another type of relationship that can unfortunately be abusive. In abusive relationships, high fees are generated for promoters, and an attempt is made to game the tax system with grossly inflated deductions.
12. International Schemes
The final scam on this year’s dirty dozen are scams that have some type of international element to them. The IRS outlines 3 of the most common types of international scams they have identified.
- Offshore accounts and digital assets – The IRS states that they are continuing to investigate individuals who attempt to hide assets in offshore accounts or through digital assets such as cryptocurrency. The IRS is able to track foreign and digital assets, so the notion that they are unable to do so is entirely false.
- Maltese individual retirement arrangement misuse – This scheme is when individuals from the U.S. attempt to avoid paying taxes by contributing to foreign individual retirement arrangements in Malta (or other foreign countries). Individuals performing this scheme improperly assert this foreign arrangement as a “pension fund” for U.S. treaty purposes. By doing so, they claim an exemption from U.S. income on tax gains and earnings.
- Puerto Rican and foreign captive insurance – This scheme is when U.S. business owners participate in an insurance arrangement with Puerto Rican (or other foreign) corporations that the U.S. business owner has a financial interest in. The U.S. business owner claims a deduction for amounts paid as premiums for insurance coverage. Even though these businesses are labeled as insurance, they often don’t actually have the arrangements of a real insurance company.
We hope you were able to learn much from this blog post. We will continue to update it as the IRS adds to this year’s dirty doze. If you have fallen for or come across any of these scams, you can report them to the IRS with the following information from the IRS website:
“To report an abusive tax scheme or a tax return preparer, people should mail or fax a completed Form 14242, Report Suspected Abusive Tax Promotions or PreparersPDF and any supporting material to the IRS Lead Development Center in the Office of Promoter Investigations.
Internal Revenue Service Lead Development Center
24000 Avila Road
Laguna Niguel, California 92677-3405
Alternatively, taxpayers and tax practitioners may send the information to the IRS Whistleblower Office for possible monetary reward. For more information, see Abusive Tax Schemes and Abusive Tax Return Preparers.”