2023 Dirty Dozen Spotlights New Scams, Some Usual Suspects

The Internal Revenue Service has released its annual Dirty Dozen list of the top scams and schemes posing threats to taxpayers and tax pros, and this year sees some new schemes among the known scams from previous lists.

While not ranked by importance or enforcement priority, the list shows the lengths scammers, hackers, and other thieves will go to crack the cyber defenses of tax preparers and their clients.

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The Dirty Dozen list is issued every year by the IRS and Security Summit, a group of IRS officials, state tax agency, and national tax industry partners. The Summit is aimed at identifying security threats and devising defense strategies against them.

Let’s get started.

Bogus Employee Retention Credit Claims

The Employee Retention Credit was created to help a specific type of business that continued to pay employees while the firm was shut down during the COVID-19 pandemic. The credit is not available to individuals.

Scammers, however, hawk the credit on TV, radio and the internet as a way for anyone—whether a business or an individual—to file and get a big payday from the government. In truth, many of these claims are built on bogus eligibility statements and payout estimates rooted more in wishful thinking than in reality.

The real danger, the Security Summit cautions, is these third-party filers charge fees for their “service,” leaving taxpayers in the lurch when they’re turned down for a credit they cannot get. Individuals should remember the IRS holds the taxpayer responsible if their return isn’t accurate.

Using Text or Email to Trick Tax Pros and Taxpayers

This is a perennial offender in the Dirty Dozen lists.

The format is simple: Scammers send emails or texts to tax professionals that appear to be from potential clients, or they may target taxpayers by posing as the IRS or some other official agency.

The point of these bogus communications is to get the target tax pro or taxpayer to divulge vital personal information such as a Social Security number, account login information or other details that could help the scammer steal the taxpayer’s identity.

These attacks come in two basic forms: phishing and smishing. Phishing is an email sent by scammers posing as some sort of official agency or business. The email may threaten the recipient if they don’t click a certain link or pay a bogus fee, or offer a non-existent tax refund.

Smishing uses a text or smartphone SMS message in lieu of an email, with the same purpose. Smishers sometimes send messages warning that your account has been locked, accompanied by a link to “solutions” that will allegedly fix the problem. Like phishing attempts, these will take the victim to a fake website where their information can be stolen or otherwise compromised.

Risks from either method are great for both tax professionals and taxpayers. Never click on any link in an email or text message that arrives unsolicited.

Bogus Offers of “Help” to Set Up Online Accounts

It sounds so innocent: an offer to help taxpayers set up their Online Account on the IRS website. But this comes from a No-Good Samaritan. It’s the work of an identity thief.

Setting up an Online Account with the IRS is a straightforward process, requiring no outside help to establish. The scammers frequently market themselves to the elderly and to taxpayers with a limited command of English.

The scammer’s “helpful” service hides the true goal of what appears to be a good deed: to steal a taxpayer’s personal information so the scammer can do his damage.

Once the cyberthief gets the taxpayer’s address, Social Security number or Individual Taxpayer Identification Number (ITIN), and photo identification, he can file fraudulent tax returns (all claiming huge refunds), obtain loans and open new credit accounts.

Making Fraudulent Fuel Tax Credit Claims

This one is a variation on a theme: Scammers convincing taxpayers to claim a credit they’re not qualified to receive.

In this case, it’s the Fuel Tax Credit, designed to refund fuel tax paid by farmers and other off-highway users. Scammers and promoters pitch a claim for the Fuel Tax Credit to regular taxpayers, when in reality, it’s simply not available to most taxpayers.

The scammer can make off with an inflated fee for suggesting the Fuel Tax Credit and possibly taxpayer information to help file a fraudulent tax return.

Using Fake Charities to Dupe Taxpayers

The world has experienced tragedy of epic proportions over the past few years. When there’s a disaster of any kind, whether earthquake, hurricane, or famine, thankfully some charity steps up to help the recovery effort.

But scammers have learned this and they invent fake charities to pose as legitimate humanitarian organizations so they can rake in public donations that simply go into the scammers’ pockets. Disaster victims, meanwhile are left to fend for themselves.

On top of the diverted donations, fake charities offer scammers the opportunity to pull in donors’ personal financial information, leaving donors vulnerable to identity theft for their good deed.

Beware “Ghost” Tax Preparers

This Dirty Dozen entry revolves around fly-by-night tax preparers who cut corners in order to get a higher fee from their clients. One of their tactics is to gauge their fees according to the size of the client’s claimed refund. Some of these preparers are called “ghosts,” because they refuse to sign the returns they prepare—or ask their clients to sign a blank return up front.

A ghost preparer may also ask for a cash-only payment but won’t give a receipt, create fake deductions to boost the size of the refund, or direct refunds into their bank account instead of the client’s bank account.

Taking Tax Advice Found on Social Media

Let’s face it: taxpayers are always looking for ways to increase the size of their tax refund. Unfortunately, many of these schemes can land folks in hot water with the IRS.

The agency says two scams have recently surfaced that got their attention. One involves common tax documents such as W-2s, while the other utilizes the more obscure Form 8944, which is usually used by a very limited group of tax filers. In both cases, the online proponents encouraged taxpayers to submit false information to get a refund.

As the old advice goes, if something sounds too good to be true—it probably is.

Tax Pros Are Vulnerable to Spearfishing Attacks

This scheme shows up in the tax professional’s email in-box all dressed up like a legitimate email from an official source—a state taxing agency, another tax firm, or even the IRS.

Problem is, it’s from a scammer.

The point of these ersatz emails is to trick the tax pro into divulging some of their clients’ personal financial information—or even their own, thinking they are communicating with a legitimate and trusted agency.

Spearfishing can be aimed at individual tax pros, or even whole payroll departments of businesses. The methods are the same no matter the scale.

Steer Clear of Offer in Compromise “Mills”

Some scammers advertise they can settle a taxpayer’s outstanding tax debt for pennies on the dollar, when in truth, taxpayers can do it themselves without anyone’s help.

These ads are a staple on radio and television, promoting how they got a taxpayer’s tax debt reduced to easy-to-pay monthly notes.

The scammers tout their success at negotiating with the IRS, but it’s actually all done through the agency’s Offer in Compromise, designed to help taxpayers who owe a large tax debt but don’t have the assets to pay.

No third party is required. Taxpayers can go online themselves to sign up for an OIC that sets a payment schedule for a significantly reduced tax debt amount.

Taxpayers promote their services aggressively, raking in up-front fees from taxpayers who don’t even meet the qualifications of the Offer in Compromise.

High-Income Filers Need to Think Twice

The IRS has a stern warning for wealthy taxpayers who are willing to go to any lengths to protect their bank accounts from the taxman: Resorting to illegal means to shield income can have serious consequences.

These complex schemes rely on tax shelters little-known to the average taxpayer. Whether a Charitable Remainder Annuity Trust (CRAT) or a Monetized Installment Sale, the promoter’s pitch is the same—a tax benefit that is greater than the law allows.

Taxpayers should remember that variants of these strategies have been named abusive tax avoidance schemes by the IRS.

Beware of Schemes That Abuse the Tax System

While the previous Dirty Dozen entry catered to the very wealthy, this set of pitfalls are more widely known. They are all familiar to the IRS as tax-avoidance schemes. All are promoted as ways to protect income from taxation, but when discovered, won’t protect the taxpayer from prosecution.

Two of these methods, micro-captive insurance arrangements and syndicated conservation easements, follow existing processes, but use deception in filing to inflate the benefits that protect income.

International Moves Enter Sketchy Territory

Some taxpayers rely on offshore accounts and digital assets to shield their funds from IRS scrutiny. If deception is involved, however, IRS agents take a closer look.

Another scheme has taxpayers depositing money into a so-called “pension fund” in Malta or some other foreign country. By claiming erroneous treaty provisions and improper exemptions from U.S. income tax, the scheme becomes abusive in the eyes of the IRS.

In both these examples and others known to auditors, willful deception and misstating income are seldom good strategies for filers.

Learn More About Protecting Taxpayer Data

The sheer number of scams threatening taxpayer data can seem daunting, but there are reliable educational resources available. “Keeping Taxpayer Data Secure” is a self-study course on DrakeCPE.com that covers the risks posed by cybercrime, data security best practices, and strategies for mitigating breaches.

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Story provided by TaxingSubjects.com