Be Alert to the 12 Most Common Tax Scams by Adam Cohen, CPA
Posted on May 10, 2023
by
Adam Cohen
Criminals are constantly developing new and more elaborate ways to deceive taxpayers into revealing their personal identities and financial interests and ultimately cheating the U.S. tax system. To help protect yourself from becoming a victim of these crimes, the IRS annually publishes a “Dirty Dozen” list of the most common scams for which you should be on high alert throughout the year.
Phishing and Smishing Scams
Criminals posing as the IRS send taxpayers phony emails (phishing) and text messages (smishing) with threats of imprisonment or promises of substantial tax refunds when they reveal their personal and financial information. To avoid falling victim to these identify theft schemes, taxpayers should first remember that the IRS will never initiate contact via email, text or social media. Rather, its primary source of communication with taxpayers is through the U.S. mail. Moreover, always avoid clicking on links and attachments contained in unsolicited emails and texts, which can help you avoid the risk of being hacked or unintentionally infecting your computer with ransomware.
Online Account Help from Third Parties
Scam artists posing as “helpful” third parties offer to help taxpayers create online accounts with the IRS where they can view important information about their tax circumstances. By divulging personal information, unsuspecting taxpayers essentially give away their identities to criminals who then sell that information to other bad actors or use it to obtain loans and lines of credit, to file fraudulent tax returns and to steal taxpayers’ refunds. If you have questions about your IRS account, reach out to your tax accountant or go to IRS.gov to easily create an online account on your own.
Phony Employee Retention Credit Claims
Criminals have been known to use promises of inflated tax refunds to lure taxpayers into divulging their personal information and paying unnecessary fees. These types of scams multiplied during the pandemic with bad actors setting up phony websites and promoting false claims to help taxpayers apply for government loans, tax credits and deductions that taxpayers are not in fact eligible to receive. One such scheme involves promoters’ aggressive attempts to con unqualified taxpayers to claim the Employee Retention Credit (ERC). In fact, tax accountants across the country are continuing to report they are receiving pressure from their clients to claim the ERC, even when the tax professionals do not believe the client is eligible for it. The IRS reminds taxpayers that the willful filing of false information and fraudulent tax forms can lead to serious civil and criminal penalties. Therefore, if you think you qualify for a tax credit or refund, call your tax accountant to help you work through the numbers and confirm your eligibility.
False Fuel Tax Claims
Most taxpayers do not qualify for a federal fuel tax credit, which is available only for off-highway business and farming use. However, unscrupulous tax return preparers and promoters continue to entice taxpayers into claiming these credits to inflate their tax refunds.
Fake Charities
Bogus charities are an all-too-common problem that escalates after a crisis or natural disaster strikes. Criminals who set up these fake organizations to solicit donations from well-intentioned taxpayers actually end up stealing taxpayers’ money, personal information and financial data to commit tax-related identity theft. Before opening your wallet to help those in need, take a few minutes to confirm the organization’s tax-exempt status by visiting IRS.gov or charitynavigator.org.
Unscrupulous Tax Return Preparers
Be very careful when choosing professionals to prepare and file your tax returns especially when considering that you are legally responsible for the information contained on those documents even if someone else prepares them for you. Confirm the individual has a valid Preparer Tax Identification Number (PTIN), as required by law, and ensure that he or she signs your return on the dotted line. You should never sign a blank or incomplete tax return prepared by someone else and be careful to avoid working with anyone who charges fees based on the size of the taxpayers’ refunds.
Social Media: Bad Advice and Fraudulent Filings
The IRS has identified several examples of fake and misleading tax advice posted on social media platforms, such as Twitter, Facebook and LinkedIn. These schemes encourage taxpayers to share their personal information and submit inaccurate data in the hopes of receiving a large tax refund. Instead, you should always check the legitimacy and accuracy of information you read on social media, and always remember that if it sounds too good to be true, it probably is.
Offers in Compromise Mills
The IRS’s Offer in Compromise (OIC) program is a legitimate option to help eligible taxpayers settle their tax debts for less than the amounts they owe. In fact, taxpayers can easily check their eligibility for this relief by visiting the IRS’s online Compromise Pre-Qualifier tool or by reaching out to their CPA or tax attorney. However, criminals have taken advantage of the OIC program by charging taxpayers exorbitant fees for this relief even when taxpayers are not eligible to do so.
Spearphishing and Cybersecurity for Tax Professionals
Spearphishing is a phony email attempt to steal protected information from a targeted organization or business. For example, a successful spearphishing attack on an accounting firm can expose client’s personal data and allow criminals to file fraudulent tax returns. The good news is that most professional service firms have multiple layers of data security and anti-virus software to prevent this from occurring, and they spend significant time and money training their employees to avoid falling victims to these scams.
Schemes Aimed at High-Income Taxpayers
There are two common schemes criminals use to target high-net-worth individuals. The first is the illegitimate use of charitable remainder annuity trusts (CRATs), which are irrevocable trusts that let individuals donate assets to charity and draw annual income for life or a specific period. However, promoters and taxpayer may misuse CRATs to try and eliminate ordinary income and/or capital gain on the sale of the property. In a second type of scheme, promoters falsely claim they can help taxpayers defer recognition of a gain on the sale of appreciated property using a purported monetized installment sale, for which the promoter charges a fee.
Bogus Tax Avoidance Strategies
With micro-captive insurance arrangements, the insurance company owners elect to be taxed solely on the captive’s investment income. Abusive micro-captives involve schemes that lack many of the attributes of legitimate insurance. These structures often include implausible risks, failure to match genuine business needs and, in many cases, unnecessary duplication of the taxpayer’s commercial coverages.
In addition, taxpayers should be aware of fraud related to syndicated conservation easements, which are restrictions on the use of real property. Generally, taxpayers may claim a charitable contribution deduction for the fair market value of a conservation easement transferred to a charity when the transfer meets certain requirements of the Internal Revenue Code. However, in abusive arrangements, which generate high fees for promoters, participants attempt to game the tax system with grossly inflated tax deductions.
Schemes with International Elements
The IRS is keenly aware of taxpayers’ attempts to conceal income from U.S. taxing authorities by hiding assets in offshore bank accounts, brokerage accounts, digital asset accounts and nominee entities. Truth be told, the IRS has many ways to identify and track anonymous transactions of foreign financial accounts as well as digital assets.
The IRS also has the tools to recognize Maltese individual retirement arrangements, in which U.S. citizens or residents attempt to avoid U.S. tax by making contributions to foreign individual retirement arrangements in Malta or other host countries where taxpayers lack a local connection. The same is true for Puerto Rican and foreign captive insurance, for which U.S. business owners fraudulently claim deductions for premiums paid for “insurance coverage” provided by a fronting carrier, which reinsures the “coverage” with the Puerto Rican or other foreign corporation. Despite being labeled as insurance, these arrangements lack many of the attributes of legitimate insurance.
About the Author: Adam Cohen, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency while complying with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or info@bpbcpa.com.
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