The Internal Revenue Service has released its annual “Dirty Dozen” list, highlighting the top twelve tax scams and schemes you should know about that target individuals, businesses, and tax professionals alike.
I’ll explain the items on the list to help you avoid being a victim of these schemes.
1. Employee Retention Tax Credit Claims
The ERTC is a valid credit and can be claimed, however be aware of aggressive pitches from scammers who promote large refunds. Many companies reach out to business owners saying they can claim the credit even if they don’t know they qualify. Additionally, some of these companies exist solely to collect your personally identifiable information in exchange for false promises. The scammers then use the information to conduct identity theft.
We do help businesses claim this credit, but we verify your eligibility and charge a fixed fee rather than a percentage of the credit. We do not aggressively market our services. I have also recorded how-to videos allowing you to file on your own. If you need more information, feel free to reach out to my company and know your information is safe!
2. Phishing:
Phishing scams continue to be a significant threat, with cybercriminals posing as the IRS through emails, text messages, or phone calls. They aim to trick you into revealing personal information or financial details. Remember, the IRS will never initiate contact via email, text message, or social media. Be cautious and report any suspicious communication to the IRS at [email protected].
3. Online account help from third-party scammers
Swindlers pose as a “helpful” third party and offer to guide you in creating an IRS Online Account. In reality, no help is needed. An online account provides you with valuable information. But third parties making these offers will try to steal your personal information through their assistance. You can and should establish your own online account through IRS.gov.
4 False Fuel Tax Credit claims
The fuel tax credit is meant for off-highway business and farming use and, as such, is not available to most taxpayers. However, unscrupulous tax return preparers and 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. No one wants to pay income tax, but do not claim this if you are not entitled to do so.
5. Fake Charities:
Scammers often take advantage of people’s generosity by creating fake charities to solicit donations. Before making any charitable contributions, research the organization to ensure it is legitimate and tax-exempt. The IRS website provides a search tool (https://www.irs.gov/charities-non-profits/tax-exempt-organization-search) that can help you verify the validity of a charity.
6. Unscrupulous tax return preparers
Most tax preparers provide outstanding and professional service. However, be careful of shady tax professionals and watch for common warning signs, including charging a fee based on the size of the refund. A major red flag or bad sign is when the tax preparer is unwilling to sign your return. 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. And never sign a blank or incomplete return.
7 Social media: Fraudulent form filing and bad advice
Social media can circulate inaccurate or misleading tax information, and the IRS has recently seen several examples. These can involve common tax documents like Form W-2 or more obscure ones like Form 8944. While Form 8944 is real, it is intended for a very limited, specialized group. Both schemes encourage people to submit false, inaccurate information in hopes of getting a refund. Always remember that if something sounds too good to be true, it probably is.
8 Spearphishing and cybersecurity for tax professionals
Phishing is a term given to emails or text messages designed to get users to provide personal information. Spearphishing is a tailored phishing attempt to 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.
9 Offer in Compromise mills
Offers in Compromise are an important program to help you if you can’t pay your federal tax debt. But “mills” can aggressively promote Offers in Compromise in misleading ways to people who clearly don’t meet the qualifications, frequently costing thousands of dollars. You can check your eligibility for free using the IRS Offer in Compromise Pre-Qualifier tool.
The following schemes do not apply to many, but they are important to know in case you are approached regarding any of them.
10. Schemes aimed at high-income filers
- Charitable Remainder Annuity Trust (CRAT): Charitable Remainder Trusts are irrevocable trusts that let you donate assets to charity and draw annual income for life or a specific period. Unfortunately, these trusts are sometimes misused by promoters, advisors and taxpayers to try to eliminate ordinary income and/or capital gain on the sale of the property.
- 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.
11. Bogus tax avoidance strategies
- Micro-captive insurance arrangements: 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.
- 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 170. In abusive arrangements, which generate high fees for promoters, participants attempt to game the tax system with grossly inflated tax deductions.
12. Schemes with international elements
- Offshore accounts and digital assets: The IRS continues to identify individuals who attempt to conceal income in offshore banks, brokerage accounts, digital asset accounts and nominee entities. 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. 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. 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 foreign captive insurance: 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 IRS Dirty Dozen list serves as a reminder that tax scams and schemes are a year-round threat. Protecting yourself against these fraudulent activities requires awareness, caution, and staying informed about the latest scams. Remember to verify any unsolicited communication claiming to be from the IRS, protect your personal information, choose reputable tax professionals, and be cautious when making charitable donations. By remaining vigilant, you can minimize the risk of falling victim to tax-related scams and schemes and ensure your financial security.
Internal Revenue Service | An official website of the United States government (irs.gov)
