A new issue tops this year’s annual IRS Dirty Dozen list of tax scams. The agency’s 2023 list of common tax-related frauds and abuses begins with a warning about the widespread promotion of ineligible claims for the Employee Retention Credit (ERC). The annual notice also lists a variety of other schemes—more than the promised dozen, in fact—that fraudsters often use to con businesses and individual taxpayers. (To see the entire list, visit https://www.irs.gov/newsroom/irs-wraps-up-2023-dirty-dozen-list-reminds-taxpayers-and-tax-pros-to-be-wary-of-scams-and-schemes-even-after-tax-season.)

ERC Scams: Too Good to Be True

The IRS says it put ERC scams at the top of this year’s list because of what it called “blatant attempts by promoters to con ineligible people to claim the credit” based on inaccurate information about who qualifies and how the credit is calculated.

The ERC is a refundable tax credit available to qualified businesses that continued paying employees despite either shutting down or sustaining a significant drop in revenue during the COVID pandemic. The qualification requirements—including the cause of the shutdowns, eligibility periods, and other relevant rules—are quite complex. Moreover, they’ve been revised several times.

Taking advantage of the confusion, unscrupulous promoters offer to handle companies’ ERC applications, often aggressively pressuring businesses to sign up for a promised windfall in exchange for a sizable upfront fee. More recently, other scammers have begun hosting websites that offer to let taxpayers check their eligibility online, but which in fact are used only to collect taxpayers’ personally identifiable information for use in identity theft or for sale on the dark web.

Phishing, Smishing, and Identity Theft Schemes

Identity theft is the objective of several other scams on this year’s Dirty Dozen list as well. The agency warns taxpayers to watch out for phony emails (phishing) or text messages (smishing) that appear to be notices from legitimate federal or state tax authorities. Their real purpose, of course, is to trick victims into providing financial information that can lead to identity theft.

In addition to reminding taxpayers never to click links in an unsolicited email, the IRS also points out that it initiates most contacts through regular mail and will never make its first contact regarding a tax issue using email, texts, or social media.

The 2023 list also warns against identity theft scammers who offer to help taxpayers create an online account at IRS.gov when, in reality, taxpayers seldom need help signing in to this IRS service.

Phony Credits, Refunds, and Charity Deductions

Illegitimate ERC claims are not the only spurious tax credit and refund schemes fraudsters run. For example, the IRS reports an increase in unscrupulous promoters urging taxpayers to file erroneous claims for federal fuel tax credits. These credits are meant for off-highway business and farming use only and generally are not applicable to many companies.

The Dirty Dozen list also warns taxpayers to watch out for bogus charities, which often arise after a crisis or natural disaster, seeking both money and personal information they can exploit.

Tax Avoidance Scams

The Internal Revenue Code offers various legitimate ways for high-income taxpayers to reduce their taxable income or shield some investment gains from taxes. Unfortunately, scammers often con taxpayers into misusing these provisions.

Examples on this year’s list include illegitimate uses of Charitable Remainder Trusts and monetized installment sales transactions. Both are legitimate tools for reducing taxable gains on the sale of appreciated property, but promoters often abuse them by seeking large fees or other illicit income.

The Dirty Dozen list identifies three scams involving international tax issues. These include hidden offshore bank and brokerage accounts, illicit offshore accounts holding digital assets such as cryptocurrency, and individual retirement arrangements in Malta and other host countries that promoters incorrectly claim are tax-exempt pension funds. The agency also warns businesses to beware of captive insurance arrangements involving certain Puerto Rican companies or other foreign businesses.

Bogus Consultants and Advisors

Scammers who pose as legitimate tax preparers always concern the IRS. This year’s Dirty Dozen list includes a special warning against tax preparers who charge fees based on the size of a promised refund or who refuse to sign client returns or include their IRS Preparer Tax Identification Number as required by law.

A similar scheme involves Offer in Compromise “mills,” which aggressively promote the Offer in Compromise debt relief program to taxpayers who clearly do not qualify. Finally, this year’s list warns of misleading tax information on social media, including schemes that encourage people to submit false information on Form W-2 or other IRS forms in hopes of getting a large refund.

This year’s Dirty Dozen list demonstrates once again that timeless advice: If something seems too good to be true, it probably is. When you encounter a proposed tax strategy that promises surprising results, your first call should be to your trusted tax professional.

Please contact Holbook & Manter with any questions you have. We would be happy to assist you.