From the IRS’ Notice IR-2023-71, published on April 5, 2023, the IRS provides its annual list of Dirty Dozen tax scams for 2023. The biggest takeaway is again being wary of sharing sensitive personal data over the phone, email or social media and “a tax deal that sounds too good to be true” says IRS Commissioner Danny Werfel.
In Summary:
1. Employee Retention Credit claims. Be Wary of aggressive pitches promoting large refunds related to the Employee Retention Credit (ERC); most often these are based on inaccurate information and on some occasions “exist solely to collect the taxpayer’s personally identifiable information” and are used to conduct identity theft.
2. Phishing and smishing. Be alert to fake communications in the form of unsolicited text (smishing) or email (phishing) for identity theft. The IRS initiates most contacts through regular mail.
3. Online account help from third-party scammers. Swindlers pose as a “helpful” third party and offer to help create a taxpayer’s IRS Online Account at IRS.gov. in an effort to steal a taxpayer’s personal information. You are able to establish your own online account through IRS.gov.
4. False Fuel Tax Credit claims. This credit is meant for off-highway business and for farming; it is not available to most taxpayers.
5. Fake charities. Scammers set up these fake organizations and seek money and personal information. Charitable donations only count if they go to a qualified tax-exempt organization recognized by the IRS. You can find this information on the IRS.gov website.
6. Unscrupulous tax return preparers. Watch for common warning signs: charging a fee based on the size of the refund; unwilling to sign the return/”ghost” preparers, or will sign but refuse to include their IRS Preparer Tax Identification Number (PTIN) as required by law. Taxpayers should never sign a blank or incomplete return.
7. Social media: Fraudulent form filing and bad advice. Not everything you read on social media is true; Often the schemes encourage people to submit false, inaccurate information in hopes of getting a refund.
8. Spearphishing and cybersecurity for tax professionals. Spearphishing is a tailored phishing attempt to a specific organization or business and there is greater potential for harm if the tax preparer has a data breach which can result in the theft of client data, the tax preparer’s identity, and allow the thief to file fraudulent returns.
9. Offer in Compromise mills. Offers in Compromise help people who can’t pay to settle their federal tax debts where these “mills” mislead people who clearly don’t qualify and cost taxpayers thousands of dollars. See: IRS Offer in Compromise Pre-Qualifier tool.
Schemes aimed at high-income filers:
- Charitable Remainder Annuity Trust (CRAT): These are irrevocable trusts allowing individuals to donate assets to charity and draw annual income for life or a specific period. Said trusts are sometimes misused to try to eliminate ordinary income and/or capital gain on the sale of the property.
- Monetized Installment Sales: Promoters facilitate a purported monetized installment sale for the taxpayer in exchange for a fee.
Bogus tax avoidance strategies:
- Micro-captive insurance arrangements: Abusive micro-captives involve schemes that lack many of the attributes of legitimate insurance and often include implausible risks, failure to match genuine business needs and, in many cases, unnecessary duplication of the taxpayer’s commercial coverages.
- Syndicated conservation easements: Here, taxpayers claim a charitable contribution deduction for the FMV of a conservation easement transferred if the transfer meets the requirements of IRC § 170. Here, promoters get higher fees and participants employ grossly inflated tax deductions.
Schemes with international elements:
- Offshore accounts and digital assets: The IRS continues to identify attempts to conceal income in offshore banks, brokerage accounts, digital asset accounts and nominee entities. U.S. persons are lured into placing their assets in offshore accounts and structures saying they are out of reach of the IRS which are not true.
- Maltese individual retirement arrangements misusing treaty: U.S. citizens/residents attempt to avoid U.S. tax by contributing to foreign individual retirement arrangements in Malta/or potentially other host countries and lack any local connection to the host country. By improperly asserting the foreign arrangement as a “pension fund” for U.S. tax treaty purposes, the U.S. taxpayer improperly claims an exemption from U.S. income taxes from the foreign individual retirement arrangement.
- Puerto Rican and foreign captive insurance: U.S. business owners participate in a purported insurance arrangement with a Puerto Rican/other foreign corporation where U.S. business owner has a financial interest. They claim The U.S. business owner (or a related entity) claims deductions for amounts paid as premiums which reinsure “coverage” with the Puerto Rican or other foreign corporation. These arrangements lack many of the attributes of legitimate insurance.
The IRS reminds everyone that it will challenge the positions taken and impose penalties and/or involve the IRS Criminal Investigation Division where appropriate as taxpayers are legally responsible for what’s on their return.
To report an abusive tax scheme or a tax return preparer, people should mail or fax a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers (PDF) and any supporting material to the IRS Lead Development Center in the Office of Promoter Investigations.