The "Dirty Dozen" list is released every year by the IRS as a way to warn taxpayers about the twelve most current and prominent scams taking place. The 2021 list was broken up into four categories: pandemic related scams, personal information cons, targeting unsuspecting victims, and leading taxpayers into taking unscrupulous actions. IRS Commissioner Chuck Rettig was quoted as saying that there are continued efforts to "steal money and information from honest taxpayers in a time of crisis" and that everyone should "remain vigilant to protect ourselves and our families."

Pandemic Related Scams

Theft of Economic Impact Payments

Eligible taxpayers will automatically get their stimulus payments from the IRS, whether by mailed check or direct deposit. Any phone calls, text messages, or emails inquiring about bank information or wanting the taxpayer to verify data should be viewed as suspicious and deleted, as the IRS does not initiate contact in those ways. Taxpayers should also check their mail frequently in order to avoid mailbox theft.

Unemployment Fraud

During the pandemic, many people went through the unfortunate experience of losing their jobs and received unemployment compensation from the state. Scammers took advantage of this uncertain time and filled out fraudulent unemployment claims using stolen personal information. The compensation received from these claims went to the scammers. If you are sent a Form 1099-G, which reports unemployment compensation, for funds that you did not receive, it is important to contact the appropriate state agency for a corrected form.

Personal Information Cons

Phishing Scams

Taxpayers should be continuously on the lookout for fake emails, text messages, websites, and social media attempts to steal your personal information. These scams attempt to persuade taxpayers into downloading harmful programs onto their devices, allowing for personal information to be stolen. Taxpayers should be wary of scams that guarantee a big refund, inform you of a missing stimulus payment, or issues a threat. You should never open attachments, or click on links, if you do not trust the source.

Vishing Scams

Vishing, or voice-related phishing, scams are unexpected phone calls requesting personal financial information. In 2020, reported vishing scams increased by 14%. Of those, 25% used the threat of a tax lien in order to get information. It is important for taxpayers to remember that: the IRS contacts you first by mail, not by phone, about any issues. When they do contact by phone, they will not insist on instant payment by gift cards, prepaid debit cards, or wire transfer; and the IRS will not request personal information by email, text, or social media.

Social Media Scams

Scammers lurk on social media accounts in order to gain personal information to use against the taxpayer. They may then send communications impersonating your friends, family, or co-workers. The scammers will try to convince their target that they are dealing with someone they know in order to gain personal information from them. People should know that information publicly shared on social media can be collected and used against you. It is important to update your privacy setting and limit information that is shared.

Taking Advantage of Unsuspecting Victims

Fake Charities

Scams requesting donations for disaster relief are common over the phone, so taxpayers should investigate a charity before donating. Taxpayers who give money or goods to a charity may be able to claim a deduction on their tax return, but this only applies to qualified charities. You can check the status of a charity on the Tax Exempt Organization Search tool on the IRS website. Taxpayers should be suspicious of calls that are trying to pressure you into giving money, calls that cannot provide a name, web address or mailing address for the charity, or calls that want the donation paid by gift card or wiring money.

Immigrant and Senior Fraud

Scammers will purposely target groups with limited English in order to confuse and get information from them. By threatening jail time or deportation, the scammers are more likely to gain access to personal information from this more vulnerable group. These threats should not be engaged, and it is important to remember that the IRS will first make contact through the mail. IRS employees also cannot threaten to have people deported or revoke licenses. Scammers will also target senior citizens. Senior citizens and those that care for them should be aware of the possible scare tactics used by scammers to get information.

Offer in Compromise "Mills"

An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS to resolve the taxpayer's tax debt.  The IRS can settle federal tax outstanding debts by accepting an amount less than full payment if certain requirements are met. OIC mills charge excessive fees and mislead people into believing they meet the requirements to relieve their tax debt, even though they know the person will not qualify. Instead, taxpayers can use the Offer in Compromise Pre-Qualifier Tool on the IRS website to see if you qualify.

Dishonest Tax Return Preparers

Taxpayers should be wary of preparers that will not sign the tax return that they prepared. By law, anyone who is paid to prepare tax returns must have a valid Preparer Tax Identification Number (PTIN) and use it to sign the return. Lookout for tax preparers that require payment in cash only and will not provide a receipt, create fake income to qualify taxpayers for tax credits, claim fake deductions, or require that tax return refunds be deposited into their own bank account. It is important to remember that taxpayers are legally responsible for what appears on their tax return even if someone else prepares it, so it is vital that an honest tax preparer is chosen.

Tricking Taxpayers into Unethical Actions

Improper Claims of Business Credits

Some tax scams are based on the idea of "promoters" who champion large tax deductions by finding ways to cheat the system through abusive arrangements. An example of this would be claiming research and development credits (R&D) when there was actually no R&D testing taking place. There must be documentation of their research and they must be able to prove the amount of qualified expenses. Scammers may market this as a way to receive a larger tax deduction, hoping the IRS will not notice or question the claims made for the credit. Taxpayers should not participate in false claims to the IRS.

Installment Sale Scheme

Promoters may find taxpayers looking to defer the recognition of gain on the sale of property and set them up for an abusive monetized installment sale. With this, there would be an improper delay of the recognition of proceeds until the final payment of the note many years later. Anyone involved should contact an independent consultant.

Abusive Use of the US-Malta Tax Treaty

There is an interpretation of the US-Malta Income Tax Treaty that allows for people to take the position that they may contribute appreciated property tax fee to certain Maltese pension plans. Currently, the IRS is evaluating the issue to determine the reasonableness of these arrangements, so this tax treatment may be challenged. If a promoter tries to convince a taxpayer into taking this position, they should be aware that the IRS may decide against such treatment.

It is more important than ever to be aware of the tax scams out there, taking all the necessary precautions to keep your personal information safe. If you have any questions or concerns about tax scams, please do not hesitate to contact a trusted Dermody, Burke and Brown tax advisor.

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.