Over the past couple of weeks, the IRS has been rolling out its list of tax scams for 2023. Now that the IRS annual Dirty Dozen campaign has wrapped, here’s a look at what taxpayers should watch out for this year.
Dirty Dozen
The “Dirty Dozen” is an annual list of common scams taxpayers may encounter. Many of these schemes peak during tax filing season as people prepare their returns or hire someone to help with their taxes. The schemes put taxpayers and tax professionals at risk of losing money, personal information, data, and more.
“Scammers are coming up with new ways all the time to try to steal information from taxpayers,” said IRS Commissioner Danny Werfel.
“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. And people should always remember to be wary if a tax deal sounds too good to be true.”
Aggressive Employee Retention Credit Claims
Taxpayers should be aware of aggressive pitches from scammers who promote large refunds related to the Employee Retention Credit, or ERC. ERC mills made the list following what the IRS calls “blatant attempts by promoters to con ineligible people to claim the credit.” The IRS specifically highlighted schemes from promoters blasting radio and internet ads touting ERC refunds. These promotions can be based on inaccurate information related to eligibility for and computation of the credit.
Phishing And Smishing
Phishing and smishing are fake communications posing as actual notices from legitimate organizations intended to trick you. Specifically, phishing is a form of email sent by scammers who are impersonating the IRS or other legitimate organizations. The email lures victims by pretending to have something of value—like a phony tax refund—or scaring them into believing that they must act immediately—like suggesting false criminal charges are imminent.
Online Account “Help”
The IRS has long encouraged taxpayers to sign up for an online account at IRS.gov—you can access your individual account information, including any checking outstanding balance or refund, reviewing notices or tax records (including transcripts), making payments, and more. But IRS is warning about a scam where swindlers pose as a “helpful” third party to help you set up your online account. This is an attempt to steal your personal information, including your address, Social Security number, or Individual Taxpayer Identification number (ITIN), to sell or file fraudulent tax returns, obtain loans, and open credit accounts. You can set up an account yourself—it’s easy, I promise—but if you need help, consult with a trusted tax professional.
False Fuel Tax Credit Claims
The fuel tax credit is meant for off-highway business and farming use—it’s a pretty targeted credit that isn’t useful or available for most taxpayers. However, third parties may try to persuade you to claim the credit to get a large refund fraudulently. Those scammers typically have their own gain in mind, including inflated fees, refund fraud, and identity theft.
Fake Charities
The IRS urges everyone to be alert for scammers operating fake charities, especially following major disasters. Scammers set up these fake organizations to take advantage of your generosity. Not only do fraudsters want your money, but they may also be looking to scam you out of personal and financial data that can be used in tax-related identity theft.
Unscrupulous Tax Return Preparers
I’m a big believer in using a tax preparer at tax time—I even have someone who does my taxes (I joke that it’s how I stay married). But choose carefully and avoid shady tax professionals who make lots of promises, including super-sized or ultra-fast refunds. Avoid “ghost preparers” who are willing to take your money but not willing to sign your return or include their IRS Preparer Tax Identification Number (PTIN) as required by law. Never sign a blank or incomplete return.
Social Media: Bad Advice
Social media is good for many things, but bad or misguided tax advice is rampant. The IRS is warning taxpayers to avoid new scams aimed at falsely inflating tax refunds, especially those found on social media. Scams like this one, involving Form W2, encourage people to submit false, inaccurate information to get a refund.
Spearphishing and Cybersecurity For Tax Pros
We’ve already talked about phishing—but spearphishing? It’s exactly what it sounds like—a very targeted phishing attempt. These attempts usually begin with a suspicious email that may look like a tax preparation application or communication from an e-service or platform you’re familiar with. Some scammers will use the IRS logo and subject lines like “Action Required: Your account has now been put on hold.” The idea is to lure you into providing information or clicking on links. Clearly, because of the significant amount of data that tax pros access, there is more potential for harm if the tax preparer has a data breach. The IRS warns tax pros to be diligent, especially during the busy season.
Offer in Compromise Mills
Offers in Compromise allow people who can’t pay in full to settle their federal tax debts. The IRS has renewed a warning about so-called Offer in Compromise “mills” that often mislead taxpayers into believing they can settle a tax debt for pennies on the dollar—while the companies collect excessive fees.
High-Income Filer Schemes
It’s true that high-income taxpayers often seek ways to mitigate their tax bills. It’s also true that there are legitimate ways to do this—and tax professionals who can help. The IRS is warning about unscrupulous preparers who encourage taxpayers to step over the line into inappropriate tax strategies. The IRS singled out two strategies in particular: CRATs and installment sales.
- Charitable Remainder Annuity Trusts, or CRATs, are a legitimate tax strategy that can benefit charities and individuals. Unfortunately, these trusts are sometimes misused by promoters, advisors, and taxpayers who misapply sections 72 and 664.
- Monetized Installment Sales. Again, installment sales can be a legitimate tax strategy. However, the IRS alleges that some promoters encourage taxpayers to improperly delay the recognition of gain on appreciated property.
Bogus Tax Avoidance Strategies
The IRS is highlighting two tax avoidance strategies—and neither are new concerns: micro-captive insurance arrangements and syndicated conservation easements.
- 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 and include implausible risks, failure to match genuine business needs, and, in many cases, unnecessary duplication of the taxpayer’s commercial coverages.
- Syndicated conservation easements. 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.
International Schemes
The IRS continues to scrutinize attempts to hide assets in offshore accounts and accounts holding digital assets, such as cryptocurrency. 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 and digital assets.
Also notable: Maltese individual retirement arrangements misusing treaty and Puerto Rican and foreign captive insurance schemes. Taxpayers should remember that if something sounds too good to be true, it probably is.
Be On The Look Out
The IRS Criminal Investigation Division is always on the lookout for promoters and participants of these types of schemes. Think twice before including questionable arrangements like this on your tax returns—and remember that you are legally responsible for what’s on your return. Choose wisely and rely on reputable tax professionals that you know and trust.