IRS Dirty Dozen Scams: What You Need to Know
Scams. Fraud. Phishing. Being a victim of any one of these comes at a real cost to businesses and individuals, both financially and emotionally. Threats continue to rise, grow and evolve and it’s important to keep up to date with the latest ways scammers are trying to fool you into handing over your money or personal information. One great way to do that is reading over this brief summary of the latest threats the IRS has identified on their ‘Dirty Dozen’ list.
The IRS releases an annual ‘Dirty Dozen’ list featuring the top taxpayer scams for the coming year. This list isn’t exhaustive and can’t identify every threat out there, but it is an excellent place to start educating yourself (and your team if you’re a business owner). Here’s a summary of the 2023 IRS Dirty Dozen.
Employer Retention Credit (ERTC/ERC) Promoters: The Employer Retention Credit (ERC) is a legitimate pandemic-era tax credit that helped many businesses weather the changes that happened during the pandemic and rewarded businesses for keeping more employees on the payroll. However, the IRS has been warning businesses that they will be targeted by promoters claiming to help them submit tax returns and adjustments to take maximum advantage of the ERC. Unfortunately, some of these promoters are using aggressive marketing pitches and have been blasting radio and TV ads claiming they can file for huge refunds for any businesses that apply. These claims can be based on inaccurate information related to eligibility for and computation of the credit. When the adjustment claim is either rejected by the IRS or found to be incorrect during an audit, the business may owe even more money than it received for the tax credit. The business may have already paid the funds to the promoter, which may be lost, must repay any monies received from the ERC they were not eligible for and will be subject to substantial IRS penalties and interest. Sometimes all these amounts added together can reach up to 150% of the cash received as a result of filing for fraudulent claims for the ERC. So, the business ends up in a worse position than if it had never filed the fraudulent claim in the first place. There are also reports of promoters simply using an online application to collect businesses information that they then turn around and use to commit identity theft.
Phishing and Smishing Scams: Emails, texts and phone calls. These are all popular channels for scammers trying to obtain sensitive information from taxpayers by lying and saying they work for the IRS. They will try to get taxpayers to give up valuable personal or financial information so they can commit identity theft. Please remember that the IRS will always initiate contact with taxpayers by mail.
Online Account Assistance: Third-party scammers are using the creation of an IRS Online Account as an opportunity to learn social security numbers and other sensitive information by calling and offering to help taxpayers set up their online accounts. In reality, no third-party help is needed, and taxpayers can create this account themselves and keep their personal identification safe. Giving your personal information to these scammers can lead to identity theft and a big headache for taxpayers trying to sort everything out.
Fuel Tax Credit Promoters: Like the Employee Retention Credit promoters, Fuel Tax Credit promoters claim that the taxpayer is qualified for the credit when they may not be. In fact, the credit is only available for tax paid on fuel used for off-highway business and farming use and because of that is not available to most taxpayers. These scammers usually charge a big fee to assist the taxpayer in submitting these claims. So, like the ERC, taxpayers who claim this credit when they aren’t entitled to it end up paying the promoter to file a false claim, paying back the money received for the credit and paying substantial IRS penalties and interest.
Fake Charity Scams: Major disasters like hurricanes, floods and wildfires can lead to an increase in fake charities created to dupe taxpayers. When these disasters occur, people want to help those affected. Scammers take advantage of this generosity by using fake charities as a front for stealing money and private information. Be sure to take the time to thoroughly research any organization before donating.
Shady Tax Preparers: Most tax preparers provide outstanding and professional service, but taxpayers should be on the lookout for common warning signs of shady tax preparers. These include charging a fee based on the size of the refund or refusing to sign the form as a preparer as required by law. Make sure you work with a trusted and knowledgeable tax preparer.
Social Media Trends: While this may seem unsurprising to most, it bears repeating – you can’t always trust what you hear on the internet. Social media can circulate misinformation quickly, including ‘hacks’ for getting a bigger tax refund. These trends usually involve lying on tax forms or creating false income. The IRS reminds taxpayers that falsifying tax documents is illegal and penalties are involved.
Spearphishing Email Scams: Scammers have been sending email requests to taxpayers and tax professionals trying to gain access to sensitive information. These requests are specifically tailored to target the recipient and gain their trust in the hopes that the scammers will gain access to the information they seek. Be on the lookout for these emails trying to gain access to your information by claiming to be from a trusted contact.
Offer in Compromise Mills: Offers in compromise are an important IRS program that help taxpayers who can’t pay their federal tax bills. Some promoters target taxpayers that owe the IRS money by offering to settle taxpayer debts with the IRS at a steep discount for a fee. 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 companies. Taxpayers can check their eligibility for an Offer in Compromise using this free IRS tool.
Charitable Remainder Annuity Trust Schemes: Promoters can misuse Charitable Remainder Annuity Trusts and monetized installment sales by misapplying the rules, leaving filers vulnerable. These types of schemes are often targeted at wealthy taxpayers. Make sure you speak with a trusted tax advisor before you enter these types of transactions, which can be complex and could cause substantial problems with the IRS if they are found to be abusive.
Bogus Tax Avoidance Strategies: The IRS warns taxpayers to be wary of anyone claiming to reduce their taxes owed drastically or even to nothing. The IRS has identified several common tax avoidance strategies. First, micro-captive insurance companies can be legitimate options for specialized insurance coverage. However, abusive micro-captives lack many attributes of legitimate insurance. Likewise, syndicated conservation easements can be a legitimate tax deduction, but tax avoidance schemes have been abusing this provision in an attempt to game the system. Speak with your trusted tax advisor before entering into these types of arrangements.
International Tax Schemes: Any tax evasion strategy can run up significant penalties. Ones that involve foreign activities can run up even larger penalties. Some other areas the IRS warns taxpayers about include: offshore accounts and digital assets. In this digital age, the IRS is tracking and identifying anonymous transactions digitally, including those overseas. Some individuals have been misconstruing legitimate tax treaty provisions with Malta to try to exempt US income from tax by contributing to Maltese individual retirement arrangements. Several abusive captive insurance arrangements have also been setup in Puerto Rico that lack proper requirements for insurance coverage. Extremely large penalties are imposed if these types of arrangements are not disclosed and handled correctl
Be diligent with your information, teach your employees how to recognize scams, and be sure to discuss any changes in tax strategy with your Melton & Melton tax professional. If anyone contacts you with a claim that seems too good to be true, it probably is.
Be on the lookout for our follow up articles digging deeper into each of these scams and schemes to better protect yourself and your company.