The end of the year is a good time to review the annual “Dirty Dozen” list of common tax-related scams published by the IRS. The agency urges taxpayers to be especially alert to these schemes, both during tax filing season and throughout the year.
Instead of the traditional numbered list it published in prior years, this year the agency offers a longer, general discussion of more than a dozen common scams, which it has organized into four broad categories.
1) Pandemic-Related Scams
With some pandemic relief programs winding down, scams related to these programs may decrease. Nevertheless, fraudsters are still taking advantage of the situation. The IRS warns taxpayers to be particularly alert for text messages, phone calls, or emails inquiring about bank account information, stimulus payments, tax credits, unemployment benefits, or other pandemic relief measures.
2) Personal Information Cons
This year’s “Dirty Dozen” list includes warnings against phishing scams that use phony tax-related emails or websites to steal personal data or download malicious programs to a taxpayer’s computer. The IRS also notes that “vishing,” or voice-related phishing, is increasing, particularly related to federal tax liens. Generally, the IRS will first contact a taxpayer by mail, not by phone, and it never requests payment over the phone using a credit card, wire transfer, or money order.
This year’s list also cautions taxpayers against revealing personal information on social media, where con artists can use such information to impersonate legitimate contacts. It is good practice to regularly review privacy settings and limit which data is publicly shared. With ransomware attacks still increasing, the agency also notes that a strong cybersecurity program is a must for any business.
To help taxpayers avoid identity theft, the IRS has now made its Identity Protection PIN (IP PIN) program available to all taxpayers (https://www.irs.gov/newsroom/all-taxpayers-now-eligible-for-identity-protection-pins). Previously, only victims of ID theft could participate. The IP PIN is a six-digit code, known only to the taxpayer and the IRS, which helps prevent identity thieves from filing fraudulent returns.
3) Ruses That Focus on Unsuspecting Victims
In addition to warning taxpayers of fake charities or frauds that target senior citizens or those with limited English proficiency, this year’s “Dirty Dozen” list makes special mention of offer-in-compromise (OIC) mills. These operators promise to help taxpayers settle tax debts for “pennies on the dollar” but rarely deliver on their promise. The IRS recently released a video that shows how to access the OIC program directly without paying excessive fees to an OIC promoter (https://www.irsvideos.gov/OIC).
With increased interest in charitable giving during this holiday season, taxpayers should make sure they are supporting legitimate charities. Use the IRS’s Tax Exempt Organization Search tool (https://www.irs.gov/charities-non-profits/tax-exempt-organization-search) to verify a charity’s status.
This year’s list warns against unscrupulous “ghost” income tax preparers who refuse to digitally or manually sign returns they prepare. Often, they also create fake deductions or tax credits to boost refund size. The agency also warns employers to avoid being unwitting participants in unemployment insurance fraud schemes, in which employees attempt to obtain state or local benefits to which they are not entitled.
4) Schemes That Persuade Taxpayers into Unscrupulous Actions
The final category includes five schemes that are aggressively marketed by ruthless promoters. The IRS recently created the Office of Promoter Investigations for the specific purpose of enforcing against such arrangements.
The following are the five scams on this year’s list:
- Syndicated conservation easements. Promoters form partnerships to purchase undeveloped land that can be set aside for conservation easements. They then use inflated land appraisals to generate unwarranted tax deductions.
- Abusive microcaptive arrangements. Promoters persuade owners of closely held businesses to form captive insurance companies that insure against implausible risks or duplicate existing coverages. The excessive premiums paid are then used to skirt tax laws.
- Misuse of the U.S.-Malta Income Tax Treaty. Using an obscure provision of this treaty, promoters persuade taxpayers to contribute appreciated property to certain Maltese pension plans, claiming the assets can then be sold with no tax consequences. The IRS is investigating such arrangements and is likely to challenge the tax treatment.
- Improper business credit claims. In some cases, promoters offer to assist clients with filing refund claims based on the research and experimentation tax credit, even though the taxpayers do not satisfy the requirements to claim the credit.
- Improper monetized installment sales. In these schemes, promoters organize an abusive shelter that lets taxpayers sell appreciated property and improperly delay recognition of the gain. This is done through an intermediary using an installment note that provides for interest-only payments for many years.
The best defense against such schemes—or any other scam that promises surprisingly lucrative tax benefits—is to remember the familiar adage: if it sounds too good to be true, it probably is. Always check with a tax professional before getting involved.
You can find more information about this year’s “Dirty Dozen” list on the IRS website at https://www.irs.gov/newsroom/dirty-dozen.