Tax Scams: The “Dirty Dozen” to Avoid

Compiled annually, this list warns taxpayers of the top 12 tax scams that may be encountered anytime, but that peak in activity leading up to and during tax season. Unfortunately, the time when people are preparing their income tax returns is a ripe time for criminals to hack computers, commit fraud, steal personal data and money.

Below is a summary of this year’s list[1] of potential scams to stay vigilant about and some tips to help you to avoid becoming a victim.

Phishing and Smishing

Scammers often send fake emails and/or text messages (smishing) coaxing individuals to click on nefarious websites links, divulge personal or financial information or download a file that contains malware that will compromise the security of their computer. Phishing and smishing attempts can come from a variety of sources and often use scare tactics to entice the victim to act immediately out of fear that their accounts have been compromised or that they are in trouble with the IRS or other government agency.

Questionable Employee Retention Credit Claims

Also known as Employee Retention Tax Credit or ERTC, Employee Retention Credit was created during the Covid-19 pandemic to help companies continue to pay their employees while their operations were partially or completely shut down. Some bad promoters are misleading employers regarding claiming this tax credit, advising them to claim more than allowed or what they are eligible for. Following this inaccurate information and guidance can lead to having to make repayment and perhaps pay penalties and interest. Refer to this ERC Eligibility Checklist to help determine eligibility.

“Helpful” Scammers Offering to Set Up Online Accounts

Scammers are posing as services that help taxpayers open online IRS accounts, but then use the information provided to steal personal information, open credit accounts, secure loans and file fake tax returns. Opening an online IRS account does not require third-party assistance. The IRS urges taxpayers to set up online accounts directly on their official IRS.gov website only.

False Tax Fuel Credit Claims

Some promoters are pushing improper fuel tax credits which most taxpayers are not eligible to claim. There have been scammers purporting to be tax preparers who “prepare returns” using fake receipts and claiming fictitious fuel use in order to charge more in preparation fees. Once paid, they are nowhere to be found when the IRS figures it out. The taxpayers are then left behind to resolve their bad claims and make restitution. Following this inaccurate information and guidance can lead to having to make repayment and potentially pay fines.

Offer in Compromise Mills

An Offer in Compromise (OIC) is an agreement where the IRS helps eligible taxpayers settle their tax bill at a reduced amount. While this is a legitimate IRS program, it is fertile ground for unethical companies and individuals (also known as OIC “mills”) who falsely advertise that they can settle tax debts at “pennies on the dollar.” In exchange for their services, they try to collect a hefty fee upfront.

Fake Charities

Crises, like those resulting from natural disasters or geopolitical unrest, can create opportunities for scammers to take advantage of sympathetic people who want to help others. Criminals may establish fake charities, sometimes with similar names to well-known organizations, to solicit donations for a current crisis, often enticing people with the possibility of an income tax deduction. Not only do they abscond with well-meaning peoples’ money, but also their personal and financial information to use for further fraud.

Fake Tax Return Preparers

Taxpayers must beware of masquerading or “ghost” income tax preparers, who may inflate a client’s tax refund with made-up tax deductions and credits the taxpayer does not qualify for, and then either charge a large percentage fee or steal the tax refund altogether before disappearing. A qualified preparer will always ask for documentation and proof of deductions. “Ghosts” may also ask for an upfront payment for services based on the level of the anticipated large refund and should be avoided.

Social Media Tax Advice

Social media is a playground for spreading inaccurate and misleading tax information, which in many cases ultimately encourages people to submit false information in the hopes of getting a refund. The IRS is wise to these scams and taxpayers can potentially face civil and criminal penalties. Some of the information being circulated can also unwittingly expose personally identifiable information which can lead to even more problems for the taxpayer. Tax advice should come from the IRS or from a trusted and reputable tax professional, not Tik Tok or other social media platforms.

Spearphishing Tax Professionals

While this scam affects tax professionals and preparers, it is still good to be aware that scammers target these professionals all year, but especially during tax time. They will send (fake) emails impersonating real taxpayer clients, in hopes that the professional will share a client’s valuable personal information as well grant access to the professional’s computer systems, divulging not only more client data but also the professional’s credentials. Tax professionals must remain vigilant. Taxpayers should ask their professionals what safeguards they have in place against fraud.

High-Income Tax Traps

Those taxpayers with higher incomes are targets for a few specific schemes and that old adage “if it’s too good to be true, it probably is” really applies. Scammers are promoting fraudulent tax saving maneuvers that can leave taxpayers dealing with civil and criminal penalties.

• Improper art donation deductions- art donations can be valid deduction. But there are scammers who target wealthy individuals, offering to sell them art for a price that is deeply discounted off its alleged value, with the idea that the purchaser will donate the art the following year and claim a deduction on the inflated value. Sometimes, they even arrange a charity to take the donation. Don’t be fooled. The IRS has art appraisal services to help taxpayers ascertain the value of their art.
• Charitable remainder annuity trust (CRAT)- these are irrevocable trusts that let individuals donate assets to charities and receive annual income for life or a certain time period. The IRS examines these trusts to make certain they correctly report income and distributions to beneficiaries, file proper tax paperwork and adhere to the laws. Sometimes these trusts are used to transfer appreciated property to eliminate capital gain. Taxpayers inaccurately claim the appreciated asset transfer which gives the asset a step-up basis to fair market value as if the asset was sold to the trust. The CRAT sells the property, not recognizing the gain due to the step-up basis and uses the proceeds to purchase a single premium immediate annuity (SPIA). The beneficiary reports only a portion of the annuity income received by the SPIA and treats the remaining portion of the payment as a tax-free return on investment. This is a misapplication of the rules. Be wary of heeding this “tax advice.”
• Monetized installment sales-Promoters target taxpayers who want to defer recognizing a gain from the sale of appreciated property. They organize and offer their victims an abusive shelter by selling them monetized installment sales in exchange for a fee. These transactions happen when an intermediary purchases appreciated property from a seller in exchange for an installment note. The installment note provides for payments of interest only and the principal being paid at the end of the term. This means that the seller gets most of the proceeds from the sale but improperly delays the gain recognition on the appreciated property until the final payment on the note, often many years later. Bad advice and a tax trap to avoid.

Fake Tax Avoidance Strategies

There are two popular tax avoidance strategies the IRS is currently warning about:

• Micro-captive insurance arrangements-a micro-captive is an insurance company where the owners elect to be taxed on the captive’s investment income only. Abusive micro captives promote schemes that lack the attributes of insurance including implausible risks, insufficient coverage or duplicate the taxpayer’s existing coverage.
• Syndicated conservation easements- a conversion easement is a restriction on the use of real property. Taxpayers can claim a charitable contribution deduction for the fair market value of the easement transferred to a charity. In abusive arrangements, which pay high fees for promoters, participants attempt to game the tax system with highly inflated tax deductions.

Schemes with International Elements

Wrapping up the 2024 Dirty Dozen list are schemes that involve international elements. The IRS has highlighted the following:

• Misuse of a tax treaty-U.S. residents or citizens contribute to foreign individual retirement accounts, in particular in Malta, in an attempt to avoid U.S. tax. These countries allow contributions in non-cash form and do not limit the amounts contributed by reference to employment or self-employment. By improperly asserting that it is a pension fund for U.S. tax treaty purposes, the taxpayer is not properly claiming exemption for U.S. income tax on gains, earnings in and distributions from the foreign individual retirement arrangement.
• Digital assets-Examples of digital assets include convertible virtual currency and cryptocurrency, stablecoins and non-fungible tokens (NFTs). Fraudulent promoters recommend digital assets claiming that they are untraceable and undiscoverable by the IRS. This is not true. The IRS can trace and track digital assets across the entire globe. Digital assets are treated as property and transactions (selling, exchanging, transferring, gifting, receiving as wages) involving digital assets are generally required to be reported on a federal tax return.

Protect Yourself from Tax Scams

Abusive tax schemes are a high priority for the IRS and the IRS Criminal Investigation Division remains vigilant in their efforts to identify and, where appropriate, impose penalties on promoters and participants in the schemes and scams. Remember, at the end of the day, taxpayers are legally responsible for the content of their returns. Here are some tips to help avoid trouble:

• Do not click on emails or email attachments, texts, or instant messages claiming to be from the IRS. The IRS will never use these forms of communication to contact you. You can report such phishing/smishing scams to the IRS at phishing@irs.gov.
• Be wary of phone calls from unrecognized phone numbers. The IRS will always first notify you by regular mail through the U.S. postal service before calling you. Similarly, if you receive a letter that looks like it is coming from the IRS requesting that you contact them, verify the phone number by calling IRS customer service 800-829-1040.
• Obtain and use the IRS Identity Protection Personal Identification Number, better known as an IP PIN, which prevents someone from filing a tax return using your Social Security number or Individual Taxpayer Identification Number.
• Always request your income tax preparer’s qualifications and signature. You should make sure they have an official Preparer Tax Identification Number (PTIN) and that they sign your completed return before you sign and submit it to the IRS. Report suspected fraudulent tax preparers to the IRS Whistleblower Office.
• Verify the charities listed on your tax return. The IRS provides on their website where you can search for and verify qualified charitable organizations for their legitimacy.
• Think twice before entering into questionable arrangements or any “tax strategies” that seem too good to be true.
• Always practice good cyber security. For more information on cyber security best practices, visit our Cyber Security page on our website.

In closing, if you suspect fraud or have been a victim of an abusive scheme or tax preparer, report it immediately to the IRS using the online Form 14242 – Report Suspected Abusive Tax Promotions or Preparers. If you would like to learn more about this year’s and prior year’s IRS Dirty Dozen Lists, visit the IRS Dirty Dozen website.