Tax season might be over, but tax scams are not. Fraudsters are constantly looking for new ways to deceive businesses and individuals into providing money, personal information and other confidential data. Therefore, taxpayers should be aware of the most common types of tax scams, so they can be vigilant in protecting themselves against malicious attempts on their information and assets.
In an attempt to better inform taxpayers of the various types of tax fraud, the Internal Revenue Service (IRS) has partnered with state tax agencies, tax preparation firms, software developers, payroll and tax financial product providers and professional accounting associations to form the Security Summit. Annually, the Security Summit publishes a “Dirty Dozen List,” outlining the 12 most common scams that can increase a taxpayer’s risk of identity theft that year. The Dirty Dozen List is not a legal document; rather, it is simply intended to alert taxpayers of the various ways that scammers may attempt to fraudulently access their information.
This year’s Dirty Dozen List outlines the following 12 most prevalent types of tax scams in 2023:
1. Employee Retention Credit Claims
Scammers are aggressively promoting large refunds related to the Employee Retention Credit (ERC) in an attempt to convince ineligible taxpayers that they are actually eligible to claim the credit. Fraudsters frequently advertise false promises related to ERC refunds via the internet and radio in an effort to collect unsuspecting taxpayers’ personally identifiable information.
2. Phishing and Smishing
Nowadays, almost all taxpayers have been exposed to fake communications from scammers posing as legitimate organizations, tempting taxpayers to either click on a malicious link, open a malicious document or provide personal information. When this type of unsolicited communication is sent via email, it’s known as “phishing,” and when it’s sent via text messaging, it’s called “smishing.” Please remember that the IRS will never contact a taxpayer by email, text or social media regarding a bill or tax refund. Mostly, all official contact from the IRS will be sent through regular mail.
3. Online Account Help from Third-Party Scammers
Swindlers are posing as a “helpful” third party, offering to help create a taxpayer’s online account with the IRS in a secret attempt to try and steal confidential information. No help is needed to create an online account with the IRS. Taxpayers can easily establish their own accounts online by visiting the IRS website at IRS.gov.
4. False Fuel Tax Credit Claims
The fuel tax credit is meant for off-highway business and farming use and is not applicable to most other taxpayers. Corrupt tax return preparers are enticing taxpayers to inflate their refunds by incorrectly claiming the credit. The IRS has seen a significant increase in the improper filing of certain refundable credits using Form 4136.
5. Fake Charities
Scammers will attempt to exploit taxpayers’ kindness by creating fake charitable organizations, especially in times of crisis or a natural disaster. These fraudulent charities are intended to seek out donations and personal information, which is then used to further exploit victims through identity theft.
6. Deceitful Tax Return Preparers
Unlike the tax professionals at BSSF, who serve clients with a high degree of professionalism and integrity, there are tax preparers who will charge their clients a fee based on the size of their tax refund. Certified Public Accountants (CPAs), Enrolled Agents (EAs) and other certified accounting professionals are strictly prohibited from charging fees based on refund amounts, and those who do so risk losing their license.
There are also “ghost” tax preparers who will prepare a return and then refuse to sign or include their IRS Preparer Tax Identification Number (PTIN) that is required by law. Please remember that a legitimate, professional tax preparer will never ask a client to sign a blank or incomplete tax return.
7. Misleading Tax Information on Social Media
The IRS has seen numerous instances of social media posts circulating misleading tax information regarding tax documents such as Form W-2 and Form 8944. This inaccurate information quickly spreads across platforms and encourages unknowing taxpayers to submit false information in hopes of getting a refund. If a taxpayer is ever unsure of the legitimacy of information found on social media, it is recommended that he or she confirms the information via the IRS’ official website.
8. Spearphishing and Cybersecurity for Tax Professionals
The IRS has already warned taxpayers of phishing for several years, but it now wants tax professionals to also be aware of “spearphishing,” or a phishing attempt that is highly tailored to a specific organization or business. These emails will feature personalized information so as to appear legitimate, and they will often stress urgency in asking businesses to click on links to input or verify information. A successful spearphishing attack can result in a data breach that not only compromises the tax preparer’s identity, but also highly sensitive data related to a taxpayer’s clients or customers.
9. Offer in Compromise (OIC) Mills
Offers in Compromise (OIC) is an important program to help taxpayers who cannot pay to settle their federal tax debts. OIC “mills” will aggressively promote OIC in misleading ways to people who do not meet the qualifications. By preying on debtors’ desperations, OIC mills can cost unsuspecting taxpayers thousands of dollars. Taxpayers can check their eligibility for free by using the IRS’ Offer in Compromise Pre-Qualifier tool online.
10. Schemes Aimed at High-Income Filers
The IRS is warning taxpayers of two schemes aimed at high-wealth individuals.
The first scheme involves abuse of charitable remainder annuity trusts (CRATs), which are irrevocable trusts that allow donors to donate assets to charity and draw annual income. CRATs are beneficial because they help taxpayers plan major charitable donations, provide predictable income and allow the deference of income taxes on the sale of assets transferred to the trust. However, some schemes aim to trick taxpayers into misusing CRATs by eliminating ordinary income and/or capital gain taxes on the sale of property.
The second scheme involves potentially abusive monetized installment sales. Scammers identify taxpayers seeking to defer the recognition of gain upon the sale of appreciated property and facilitate an alleged monetized installment sale for the taxpayer in exchange for a fee.
11. Bogus Tax Avoidance Strategies
There are several bogus strategies that scammers will promote to avoid tax requirements.
One involves abusive micro-captive insurance arrangements, which are fraudulent and lack many attributes of legitimate insurance. These structures often include implausible risks, failure to match genuine business needs and unnecessary duplication of the taxpayer’s commercial coverages.
Syndicated conservation easements are another bogus tax avoidance strategy. Syndicated conservation easements allow taxpayers to claim a charitable contribution deduction for the fair market value of a conservation easement transferred to a charity, so long as the transfer meets the requirements of Internal Revenue Code 170. Schemes will encourage taxpayers to grossly inflate their deductions in order to generate high fees for the scammer.
12. Schemes with International Elements
Rounding out the Dirty Dozen list for 2023 is hiding assets in offshore accounts and/or accounts holding digital assets, such as cryptocurrency. The IRS works tirelessly to identify individuals who attempt to conceal income in offshore banks, brokerage accounts, digital asset accounts and nominee entities. However, tax scammers continue to lure Americans into placing assets offshore by claiming they are out of reach of the IRS. These claims are simply untrue; the IRS can identify and track all types of financial accounts and transactions, whether domestic or foreign.
In conclusion, there are many different types of tax schemes that take place during and after tax season. The IRS encourages taxpayers to report individuals who promote improper and abusive tax schemes, along with preparers who deliberately prepare improper tax returns. To report a tax scheme, taxpayers should mail or fax a completed Form 14242 with supporting evidence to the IRS Development Center in the Office of Promoter Investigations. Taxpayers can also send information to the IRS Whistleblower Office for possible monetary reward.
About the Author
Carrie Small, CPA, MST, is a Tax Principal at Brown Schultz Sheridan & Fritz (BSSF). She is a leader within the BSSF Insurance Practice, which provides a full range of audit, tax and advisory services to insurance companies across the country. Within the practice, Carrie specializes in providing tax compliance, tax provision and tax consulting services to insurance entities.