The Focus - Our Tax E-Newsletter
The Dirty Dozen
The “Dirty Dozen” is a list compiled annually by the IRS that features the most common scams used to prey on taxpayers as well as scams devised for tax evasion.
Trends indicate that taxpayers should be most wary of scams during tax season, however, they could happen at any time and people should be on the lookout all year long. Those who fall victim to these scams are subject to losing money, sensitive personal information, or even having their identities stolen.
The Dirty Dozen does not include every single scam devised to prey on taxpayers, but these are a few of the most common to look out for in 2023.
Employee Retention Credit Claims:
Beware of aggressive pitches touting large refunds in the form of Employee Retention Credit (ERC). These false promotions are advertised everywhere from social media to ads on the internet and radio. Many of these advertisements exist solely to collect taxpayers’ information and conduct identity theft.
Lookout for fake communications via text or email posing as legitimate organizations. Any official communications from the IRS would most likely be conducted through mail. Suspicious emails or texts should be ignored and deleted.
Spearphishing for Tax Professionals:
Spearphishing is a tailored attempt to get information from an organization or business. These methods have gotten very sophisticated, aiming to steal client data as well as the tax preparer’s identity. If successful, the spearphisher could file fraudulent returns.
Third Party Scammers:
Be on the lookout for “helpful” third-party scammers offering to create your IRS account and file taxes through that platform. This platform is very user-friendly, so no third-party assistance should be required. If assistance is needed, reach out to the help contact information provided by the IRS.
Fake charities are prone to popping up like daisies in the wake of natural disasters, preying on people’s generous natures by asking for donations and personal information. Always be sure to research the charity, or stick to ones you know will help with disaster relief. Only charitable donations to official tax-exempt organizations may be counted toward tax deductions.
Fake Tax Return Preparers:
Most tax preparers are professionals prepared to offer helpful and legitimate services, but there are signs to look out for to spot swindlers:
- Fees based on the size of the tax refund
- Refusing to sign the document or provide their Preparer Identification Number (PTIN) as required by law
Taxpayers should never sign a blank or incomplete return.
Social channels are prone to circulating false information and poor advice for taxpayers. Always check with your tax professional to verify if something is true.
Offer in Compromise Mills:
Offers in Compromise is a real and important program designed to help people who cannot pay their federal tax debts. “Mills” aggressively promote Offers in Compromise in misleading ways to people who do not meet the qualifications, which can cost the taxpayer thousands of dollars.
Schemes Targeting High-Income Filers:
- Charitable Remainder Annuity Trust (CRAT): These are irrevocable trusts that let individuals donate assets to charity and draw annual income from life or for a specific period. These trusts can be misused by promoters, advisors, and taxpayers in an effort to eliminate ordinary income or capital gain on the sale of a property. More can be read about this here.
- Monetized Installment Sales: In these potentially abusive transactions, promoters find taxpayers who seek to defer the recognition of gain upon the sale of appreciated property. They facilitate a purported monetized installment sale for the taxpayer in exchange for a fee.
Fake Tax Avoidance Strategies:
- Micro-captive Insurance Arrangements: A micro-captive Insurance Arrangement, also known as an 83(b) is an insurance company whose owners elect to be taxed on the captive’s investment income only- not on underwriting profit. Abusive micro-captives lack many attributes that legitimate insurance possess and often are structured to include:
- Implausible risks
- Failure to match genuine business needs
- Unnecessary duplication of taxpayer’s commercial coverages
- Syndicated Conservation Easements: A Syndicated Conservation Easement involves multiple investors forming a partnership or company to purchase or invest in land, then donating it for a charitable deduction. Abusive arrangements inflate the tax deductions and generate high fees for promoters.
- Offshore Accounts and Digital Assets: Asset protection professionals and unscrupulous promoters will lure U.S. taxpayers to place their assets in offshore banks, brokerage accounts, or digital asset accounts with the assurance that these assets are out of reach of the IRS. This is untrue. The IRS can identify and track anonymous transactions of foreign accounts and digital assets.
- Maltese Individual Retirement Arrangements Misusing Treaty: These arrangements involve U.S. citizens attempting to avoid U.S. tax by investing in retirement arrangements in Malta. The IRS is actively examining taxpayers who set up these arrangements, so it is in the taxpayers’ best interest to consult their tax advisor to ensure they are compliant with tax laws.
- Puerto Rican and Foreign Captive Insurance: In these transactions, U.S business owners make a large insurance premium payment to the promoter’s insurance company, then the business takes a large deduction for that insurance coverage. The promoter will segregate the premiums received from each contributing business, let the amount grow in the offshore accounts, then payback the business owner through backdoor methods. This tax shelter scheme is not new to the IRS and taxpayers should beware.
The IRS' original article featuring the Dirty Dozen can be read here. If you have any questions about how these scams could affect your personal income tax situation, please do not hesitate to contact your tax advisor at Dermody, Burke & Brown.
The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.