This summary of this year’s most common schemes and scams was released just in time to protect taxpayers from losing hard-earned money this tax season
In April, the Internal Revenue Service (IRS) released 2023’s edition of their infamous Dirty Dozen list. A coveted record of both old and new scams, the list operates as an opportunity to educate taxpayers on the most common scams in a given year.
The Hechtman Group wanted to ensure you are caught up on the most frequent ways scammers have been taking advantage of people this year.
Below you can find a brief summary of each of the scams that appeared on this year’s list. For more information, visit the IRS’ official Dirty Dozen post on their website here.
Employee Retention Scams
ERC scams occur when a scammer contacts a business and offers to assist in their acquisition of the ERC deduction by preparing their tax documents on behalf of the employer.
The scammer then has access to sensitive information, such as social security numbers and the finances of the enterprise. Additionally, some may claim to be able to secure larger deductions than they actually can and charge costly upfront fees.
Phishing and Smishing
Phishing and smishing scams both occur when a third party posing as a legitimate source, like a bank or government agency, reaches out to a taxpayer in the hopes they accidentally disclose some type of sensitive financial information.
They typically lay bait through the use of hyperlinks and/or phone numbers in which an automated voice system tricks the caller into revealing their personal information.
Online Account Help from Third-Party Scammers
Sometimes, individuals will pose as knowledgeable industry players to try and corner taxpayers into allowing the scammer to create an IRS profile. Very sensitive information is involved in putting this profile together which leaves a perfect window for third-parties to try and act as a middleman in order to obtain a person’s finances.
False Fuel Tax Credit Claims
The IRS reported a spike in the amount of people filing for certain fuel-related tax credits this year. This credit only applies to off-highway business and farming use, meaning that the majority of taxpayers can not qualify. Nevertheless, some unethical tax return preparers have been encouraging taxpayers to falsely claim the credit.
Fake Charities
Fraudulent charities have been around a long time and tend to pop up specifically around the onset of natural disasters and other crises. Feeding off of the general public’s goodwill, these scammers pose as organizations supporting aid efforts. Instead, they pocket donations and use personal information to commit identity fraud. It is crucial to keep in mind that while taxpayers can deduct charitable contributions from their tax return, the organization must be on the list of pre-approved charities as provided by the IRS.
Unscrupulous Tax Return Preparers
Beware of suspicious individuals claiming to have more industry experience than they actually have. To avoid being taken advantage of, be weary of the common red flags associated with tax return preparers. This includes but is not limited to charging a fee based on the size of the tax refund and general unwillingness to put their signature on any important documents.
As required by IRS code, individuals must provide their respective IRS Preparer Tax Identification Number (PTIN) on the tax return.
Social Media: Fraudulent Form Filing and Bad Advice
As with any other topic or industry, social media can be a breeding ground for misinformation regarding tax return preparation, qualifications, filings and more. Therefore, it is important to remember that if an offer sounds too good to be true, it most likely is, especially when dealing with the IRS.
Spear Phishing and Cyber Security for Tax Professionals
Spear Phishing is a subset of the more commonly known scam, “Phishing.” They both rely on email and text messaging to obtain sensitive and personal information.
The only difference between the two is that Spear Phishing targets a specific business or organization as opposed to Phishing which is en masse to a large number of people. Spear Phishing scammers can provide more tailored and believable messaging to specific individuals, increasing their perceived trustworthiness.
Offer in Compromise Mills
The Offer in Compromise system is a program offered by the IRS that assists taxpayers in settling their debts when they can not pay.
However, there are “mills” popping up that present this program in a number of misleading ways and then upcharge people for their services. When their claim gets denied, the scammers are nowhere to be found and the taxpayer is out thousands.
For those unsure as to whether they qualify for an Offer in Compromise or not, the IRS offers eligibility checkers on their website here free of charge.
Schemes Aimed at High-Income Filers
In this year’s list, the IRS has noted two platforms in which scammers have been targeting individuals with high incomes, the first being Charitable Remainder Annuity Trusts (CRATs). This tax-exempt entity allows its beneficiaries to maintain their income stream while simultaneously making charitable contributions to various organizations of their choice. Alas, these trusts are vulnerable to individuals trying to get rid of ordinary income and/or capital gains associated with the sale of property.
The second scheme targeting high income individuals has been through monetized installment sales. In these transactions, promoters assist taxpayers who wish to postpone the recognition of gain when they sell an appreciated property. They do this by executing what is called a monetized installment sale, and they in turn charge a fee for the performance of this service.
Bogus Tax Avoidance Strategies
The IRS has seen numerous fraudulent approaches to minimizing the amount of taxes an individual is required to pay in a given year. Below are two of the most common for 2023.
A micro-captive is an insurance company where the owners choose to pay tax only on the investment income earned by the captive. However, abusive micro-captives involve unrealistic risks, fail to match actual business requirements, and frequently involve duplicating commercial coverages needlessly for the taxpayer.
Taxpayers are usually permitted to claim a deduction for the fair market value of a conservation easement given to a charity if the transfer satisfies the rules set out in Internal Revenue Code 170. In abusive setups that result in exorbitant fees for promoters, participants try to manipulate the tax system by claiming excessively inflated tax deductions.
Schemes with International Elements
Hiding assets in offshore accounts is a highly illegal offense and undermines the integrity of the IRS. Some individuals attempt to claim that American money in banks abroad is immune to the hands of the IRS. This is not true, the IRS has warned taxpayers that it can identify and follow concealed transactions from foreign accounts and digital assets.
Individuals have also attempted to skirt paying their fair share of taxes by contributing to retirement accounts in countries that have looser tax regulations. By falsely claiming that the foreign arrangement is a “pension fund” for the purposes of U.S. tax treaties, the taxpayers misinterpret the relevant treaty rules and incorrectly assert that they are exempt from paying U.S. income tax on the foreign individual retirement arrangement.
Owners of closely held U.S. businesses have participated in an insurance scheme with foreign corporations, primarily from Puerto Rico. In this scheme, the business owner, or a related entity, claims a tax deduction for premium payments made to a fronting carrier that provides “insurance coverage.” This “coverage” is then reinsured with the Puerto Rican or foreign corporation.
Penalties and how to report
Falsifying information on tax forms is a serious offense and can lead to civil and criminal penalties.
In line with the Dirty Dozen education initiative, the IRS is encouraging individuals to report tax-related illegal schemes to their department. To report fraud or IRS-related phishing attempts, contact phishing@irs.gov or to the Treasury Inspector General for Tax Administration online or through phone at 1-800-366-4484.
While this list does cover a majority of the ways taxpayers have been scammed in the past year, this is by no means an all-encompassing record. With this in mind, it is always better to err on the side of caution when approached by individuals claiming to have some secret, lucrative method. Contact us today to gain some piece of mind and make sure all your tax-related information is exactly the way it should be.
At The Hechtman Group Ltd, we understand that tax laws and regulatory and IRS requirements for real estate are vastly different from other financial services. Rich in industry experience, our CPAs and accountants can guide you through all the necessary steps while also creating best practice opportunities for long-term growth.
The Hechtman Group Ltd specializes in accounting, tax and business consulting services for individuals, small business owners, and entrepreneurs, with expertise in real estate accounting.