Dirty Dozen: A Deeper Dive
Each year, the IRS releases an annual ‘Dirty Dozen’ list highlighting the top scams targeting taxpayers for the coming year. This list is not exhaustive and cannot identify every threat out there, but it is an excellent place to start educating yourself (and your team if you’re a business owner).
We will go over the Dirty Dozen in more detail this year with a series diving deeper into each scam and giving you ways to watch out for them. This first article will cover some of the most visible and pressing scams to avoid. The scams we will cover for this post include Employee Retention Credit Promoters, Fuel Tax Credit Promoters, Shady Tax Preparers, and Offer in Compromise Mills.
UPDATE: Effective September 14, 2023, the IRS published Information Release (IR) 2023-169 announcing IRS Commissioner Danny Werfel’s’ order to immediately stop processing new employee retention credit (ERC) claims through December 31, 2023. Taxpayers can withdraw applications that should not have been filed. The IRS has enhanced its compliance review process and it is expected any ERC claims sent to the IRS after Commissioner Werfel’s order will face much tougher scrutiny than those filed before the order was issued.
Employer Retention Credit (ERTC/ERC) Promoters: The Employee Retention Credit (ERC) is a legitimate pandemic-era tax credit that helped many businesses weather the changes from the pandemic and rewarded businesses for keeping more employees on the payroll. Many businesses have been targeted by companies claiming to help them submit tax returns and adjustments to take maximum advantage of the ERC. However, some of these promoters use tactics to “sell” the credit to unsuspecting businesses who sometimes do not even meet the criteria to claim the ERC (IRS IR-2023-105). A few of their tactics are listed below to help you watch out for them.
- Contact businesses unsolicited and claim they have an “easy application process.”
- State they can determine ERC eligibility in minutes.
- Collect large upfront fees to claim the credit or tie the fee to the value of the proposed credit.
- Claim taxpayers have nothing to lose by claiming the credit.
- Claim time is quickly running out to file for ERC refunds.
If the targeted businesses do not qualify for the credit, and the adjustment claim is either rejected by the IRS or found to be incorrect during a subsequent audit, there are consequences. As a result, the business will lose the funds paid to the promoter, will have to repay any funds received from the ERC they were not eligible for, and will owe significant amounts of IRS penalties. The IRS has made it very clear that due to the number of fraudulent claims made by these unscrupulous promoters purposely choosing to exploit the relief provided by the ERC, the IRS is and will be reviewing applications very closely and prosecuting fraudsters.
The ERC follows complex rules that need to be carefully considered: including limitations and aggregation rules that are detailed and can be difficult to understand. Most ERC evaluations take far longer than 15-20 minutes to confirm qualification online.
If you think your business may qualify, please consult with your trusted Melton & Melton tax professional who can help guide you through the process of an ERC application. While it may take some time to correctly determine the amount of ERC your business is eligible for, taxpayers who qualify have until at least October 2024 to file and claim these credits. Many times, these unscrupulous promoters will disappear by the time there is an IRS examination, leaving businesses on their own or calling in a trusted CPA to help them handle navigating an IRS audit.
Fuel Tax Credit Promoters: Like ERC promoters, Fuel Tax Credit promoters claim that the taxpayer is qualified for a credit when they may not be. The fuel tax credit is more straightforward but potentially limited to a smaller eligible group of taxpayers. Taxpayers can receive a tax credit based on the number of gallons of fuel purchased for off-highway business and farming purposes. Like other Dirty Dozen scams, contingent promoter fees should be one of the first red flag warnings that a promoter should not be relied upon for tax advice. Taxpayers should never take a credit claiming more gallons than they purchased for use in off-highway business and farming purposes. The IRS will come calling for receipts.
Shady Tax Preparers: Shady tax preparers are another area that taxpayers need to be aware of. IRS Commissioner Danny Werfel explains, “Most tax professionals offer excellent advice and can really help people navigate complex tax issues. But we continue to see instances where taxpayers are ‘ghosted’ by unscrupulous tax preparers with bad advice who quickly disappear. We encourage taxpayers to check out the tools and resources available to them to ensure they find the right tax professional for their needs.”
If you have concerns, you can start by requesting a preparer’s Certified Public Accountant (CPA), Enrolled Agent (EA), or Preparer Tax Identification Number (PTIN) credentials. Every tax professional preparing returns for compensation must have a PTIN, at the very least. These certifications and credentials can go some way to providing assurance about the paid preparer you are working with, but you must still understand and feel comfortable with the information reported on your return. Taxpayers are ultimately responsible for the information reported on their tax returns, even if they pay someone to prepare it. Some warning signs to look out for when dealing with a shady tax preparer include:
- Asking for cash-only payment without providing a receipt.
- Inventing false income or deductions to try to boost the size of the refund.
- Charging a fee based on the size of the refund.
- Refusing to sign the return you paid them to prepare.
- Asking you to sign a blank return.
- Setting up direct refunds into their bank account, not the taxpayer’s account.
If the IRS examines your return and your paid preparer has ghosted you, you could be handling an IRS audit yourself or finding a trusted CPA or EA to help you in the audit.
Offer in Compromise Mills: Offers in Compromise are an important and legitimate relief program offered by the IRS to help people who can’t pay to settle their federal tax debts. Promoters of these mills target taxpayers who owe the IRS money by offering to settle their debts with the IRS at a steep discount for a large fee. However, many times, the targeted taxpayers don’t meet the technical requirements to obtain an offer, meaning they still owe the IRS the same amount and are paying excessive fees to these dishonest promoters. For taxpayers that do qualify for the Offer in Compromise program, the promoters provide no added benefit or change in outcome. These mills only serve to take money out of the pocket of taxpayers who are already in a difficult position. Taxpayers can check their eligibility for an Offer in Compromise using this free IRS tool.
To sum up all of these scams in one sentence: if something sounds too good to be true, it probably is. We will address the eight other scams in subsequent articles so be on the lookout. If you have any questions or would like to discuss any of the items we talked about above, please reach out to us and a Melton & Melton tax professional will be happy to talk with you.
Lastly, if you know of an abusive tax scheme or tax preparer, you should mail or fax a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers, and supporting information to the IRS.
Internal Revenue Service Lead Development Center
24000 Avila Road
Laguna Niguel, CA 92677-3405