Look Out for the Dirty Dozen Tax Scams

December 14, 2023

By K-Staff

Fraud, Insighter, Taxes

It’s almost 2024, which means tax season is nearly upon us – which also means it’s time for scammers and fraudsters to try to take advantage of people filing taxes and looking for refunds.

Most tax scams ramp up during peak tax filing season, but they can occur any time of year. With that in mind, here are the Dirty Dozen from the past year – the worst of the worst in terms of tax scams – from the IRS. Be on the alert for these in 2024.

1. Employee Retention Credit claims

The Employee Retention Credit (aka the Employee Retention Tax Credit) was established as a refundable tax credit for businesses and tax-exempt organizations impacted during the COVID-19 pandemic. Unfortunately, this beneficial tax credit has been the target of several scam promotions from those claiming to be able to help with the application process. These scams have grown so prevalent the IRS has paused processing on ERC claims effective September 14, 2023.

For those who are seeking to claim this credit, work with a vetted and trusted tax professional and review the requirements for eligibility first – don’t listen to promises of large refunds from companies claiming they can help you claim the credit now. At best, you will be disappointed by false promises. At worst, you could be opening yourself up to identity theft.

2. Phishing and smishing

So many scams boil down to the same root cause – an email or text message purporting to be from someone like the IRS, trying to separate you from your personal information or your hard-earned money. Tax-based phishing (email) and smishing (text message) attempts tend to use a carrot (phony tax refund) to entice victims or a stick (false legal and criminal charges, compromised accounts, etc.) to drive victims to act out of fear.

Stay calm and act rationally if you receive a communication like this, and remember, the IRS, like most government entities, will never call, email, or text you to initiate first contact. If you have any questions about an IRS communication, call the IRS directly at (800) 829-1040.

3. Online Account Help from Third-Party Scammers

An online account with the IRS can be helpful, giving you access to useful information like your payment history and tax transcripts. However, you don’t need help from a third party to set it up.

If you get a notice from someone offering to help create your online account with the IRS, they are looking to steal your personal information. You can set up your own account for free on the IRS website at irs.gov.

4. False Fuel Tax Credit Claims

The Fuel Tax Credit is for off-highway business and farming use and is therefore not available to most taxpayers. However, some tax return preparers and promoters are trying to lure taxpayers into inflating their refunds by claiming the credit, and then garnering increased fees as part of this refund fraud.

Before you claim a tax credit, seek advice from a legitimate source. If you knowingly claim a tax credit you aren’t entitled to, you may face fines or even prosecution for the offense.

5. Fake Charities

Whether we look to give to those less fortunate during the holidays, or we look to support those impacted by natural disasters like floods and wildfires year-round, charitable contributions are always in season for scammers.

Don’t let your good nature blind you to suspicious organizations claiming to represent charities that benefit the needy. If you receive a communication that expresses urgency in giving your personal information or money or asks for donations by gift card or wire transfer, don’t give right away.

Verify the charity’s exact name, website and mailing address, and don’t give out more information than you need to – you should never need to provide your Social Security Number, and you should only give your bank account or credit card number once you’ve confirmed the validity of the charity in question.

6. Unscrupulous Tax Return Preparers

Most tax preparers are honest professionals who provide outstanding service; however, some tax preparers are not so scrupulous. Be on the lookout for fees based on the size of your refund, or if the tax preparer isn’t willing to sign off on their work.

Avoid “ghost” preparers, who will prepare a return but won’t sign it or provide their IRS Preparer Tax Identification Number (PTIN) – and you should never sign a blank or incomplete return.

7. Social Media: Fraudulent Form Filing and Bad Advice

Social media can be a good source of news and information, but it can also be a terrific source for misinformation. Tips from TikTok, Facebook, or other social media providers promising lower taxes or increased refunds should be cross-checked with a tax professional. If something sounds too good to be true, it probably is.

8. Spearphishing and Cybersecurity for Tax Professionals

We are all familiar with phishing by now – the emails or text messages engineered to trick you into giving personal information to scammers and fraudsters. Spearphishing is a more targeted version of this, where communications are targeted at a specific organization or business.

Tax professionals need to be vigilant against spearphishing attacks, as they could lead to costly data breaches, putting clients and tax preparers’ identities at risk.

9. Offers in Compromise Mills

Offers in Compromise are compromised settlements made available by the IRS to help people who can’t afford to pay their federal tax debts. However, “mills” will often promise these services in misleading terms to people who do not qualify for the program and by the time they realize this, it can cost the tax payer thousands of dollars.

Taxpayers can check their eligibility for an Offer in Compromise for free on the IRS website’s Offer in Compromise Pre-Qualifier Tool.

10. Schemes Aimed at High-Income Filers

High-income filers should be wary of any tax-related scam, but there are two schemes which are targeted at them specifically:

Charitable Reminder Annuity Trust (CRAT): Charitable Reminder Trusts are irrevocable trusts that allow individuals to donate assets to charity and draw an annual income for a specific period or for life. However, these are sometimes misused by promoters, advisors, or taxpayers attempting to eliminate ordinary income or capital gains made on the sale of that property.
Monetized Installment Sales: In these transactions, promoters find taxpayers looking to defer recognition of gain after the sale of appreciated property. They facilitate a purported monetized installment sale for the taxpayer in exchange for a fee. These are potentially abusive arrangements that should be carefully reviewed by competent, independent, qualified advisors before being completed.

11. Bogus Tax Avoidance Strategies

Schemes aimed at reducing or eliminating taxes are attractive, but taxpayers should look for advice from trusted tax professionals rather than from promoters who are aggressively marketing and pushing “opportunities” such as these:

Micro-Captive Insurance Arrangements: A micro-captive is an insurance company whose owners elect to be taxed solely on the captive’s investment income. However, these arrangements can be abused, with some schemes lacking many of the attributes of a legitimate insurance arrangement. They often include implausible risks, failure to match genuine business needs, and unnecessary duplication of the taxpayer’s commercial coverages, in addition to excessive premiums paid.

The IRS has won all micro-captive Tax Court and Appellate Court cases decided on their merits since 2017, so this continues to be a high-priority enforcement area for the agency.
Syndicated Conservation Easements: A conservation easement is a restriction on the use of real property. Syndicated conservation easements can be abusive, with promoters promising to give an investor the chance to claim charitable contribution deductions and corresponding tax savings that are significantly greater than what the investor puts in. These arrangements often result in high fees for promoters while saddling the investor with liability for grossly inflated tax deductions.

12. Schemes with International Elements

Some of the best-known schemes for tax evasion revolve around the use of offshore banks and brokerage accounts, with asset protection promoters promising the accounts are out of reach from the IRS. This is false. The IRS is constantly working to identify and track transactions of foreign financial accounts as well as digital assets.

Sources:

IRS wraps up 2023 Dirty Dozen list (https://www.irs.gov/newsroom/irs-wraps-up-2023-dirty-dozen-list-reminds-taxpayers-and-tax-pros-to-be-wary-of-scams-and-schemes-even-after-tax-season)

Employee Retention Credit (https://www.irs.gov/coronavirus/employee-retention-credit)

Dirty Dozen: Watch out for scammers using email and text messages to try tricking people during tax season (https://www.irs.gov/newsroom/dirty-dozen-watch-out-for-scammers-using-email-and-text-messages-to-try-tricking-people-during-tax-season)

Dirty Dozen: Watch out for third-party promoters of false fuel tax credit claims (https://www.irs.gov/newsroom/dirty-dozen-watch-out-for-third-party-promoters-of-false-fuel-tax-credit-claims)

Dirty Dozen: IRS warns of scammers using fake charities to exploit taxpayers (https://www.irs.gov/newsroom/dirty-dozen-irs-warns-of-scammers-using-fake-charities-to-exploit-taxpayers)

Dirty Dozen: Watch out for Offer in Compromise ‘mills’ where promoters claim their services are needed to settle IRS debts (https://www.irs.gov/newsroom/dirty-dozen-watch-out-for-offer-in-compromise-mills-where-promoters-claim-their-services-are-needed-to-settle-irs-debts)

Latest IRS Scams: How to Spot Them and Fight Back (https://www.nerdwallet.com/article/taxes/avoid-irs-scams)

Welcome To The Insighter!

Look Out for the Dirty Dozen Tax Scams

1. Employee Retention Credit claims

2. Phishing and smishing

3. Online Account Help from Third-Party Scammers

4. False Fuel Tax Credit Claims

5. Fake Charities

6. Unscrupulous Tax Return Preparers

7. Social Media: Fraudulent Form Filing and Bad Advice

8. Spearphishing and Cybersecurity for Tax Professionals

9. Offers in Compromise Mills

10. Schemes Aimed at High-Income Filers

11. Bogus Tax Avoidance Strategies

12. Schemes with International Elements

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