The Internal Revenue Service (IRS) issues a list of its top tax-related scams annually, dubbed the “Dirty Dozen”. The 2023 edition of the list was recently released and warns taxpayers of the most popular scams being circulated over the past year. Take a look at the top 12 schemes you and your business should be on the lookout for this year and beyond.  

1) Employee Retention Credit Claims 

Given the popularity and appeal of the Employee Retention Credit (ERC), the IRS has advised taxpayers to be aware of aggressive pitches from scammers promoting substantial refunds. Promoters have been caught attempting to lure ineligible taxpayers into claiming the credit via radio and internet ads, basing their claims on inaccurate eligibility and computation of the credit. In the process, scammers obtain taxpayers’ personal information and can use it to steal their identity.  

2) Phishing and Smishing 

Another popular scam consists of texts (smishing) and emails (phishing) being sent to unsuspecting taxpayers from individuals posing as legitimate tax or financial professionals, such as the IRS. These texts and emails lure victims into providing personal and financial information that leads to identity theft. It’s important to keep in mind that the IRS will never contact taxpayers by email, text or social media. 

3) Spearphishing and Cybersecurity for Tax Professionals 

While phishing is a concern for individuals, spearphishing is a more tailored attempt to breach an organization or business. The IRS issued a separate warning for spearphishing since it has a larger impact than phishing alone, as a successful spearphishing attack can not only steal client data and the tax preparer’s identity, but also allow for the filing of fraudulent returns.  

4) Online Account Help from Third-Party Scammers 

In this scam, scammers pose as a helpful third party to assist in creating a taxpayer’s IRS Online Account, where they walk victims through the steps and steal their personal information along the way. In reality, no help is needed and taxpayers should create their own online accounts.   

5) False Fuel Tax Credit Claims 

The fuel tax credit isn’t available to most taxpayers, as it’s meant for off-highway business and farming use. Despite this, shady tax return preparers and promoters encourage taxpayers to inflate their tax refunds by mistakenly claiming the credit. In recent years, the IRS has seen an increase in filing certain refundable credits using Form 4136, Credit for Federal Tax Paid on Fuels. 

6) Fake Charities 

Bogus charities are an annual problem that intensifies after a crisis or natural disaster, and this year was no exception. Fake organizations are created to take advantage of the public’s generosity, seeking money and personal information. Taxpayers who donate can claim a deduction on their federal tax return if they itemize deductions, but they only count if they go to a tax-exempt organization recognized by the IRS, so it’s important to verify an organization is legitimate before donating.  

7) Corrupt Tax Return Preparers 

While most tax preparers provide excellent service, scammers are posing as tax professionals to attempt to rip off innocent taxpayers. Some red flags to look out for include charging a fee based on the size of the tax refund, not wanting to sign on the dotted line and refusing to include an IRS Preparer Tax Identification Number (PTIN) as required by law. Never sign a blank or incomplete return!  

8) Social Media: Fraudulent Form Filing and Bad Advice 

The IRS has noticed several examples of misleading tax information being spread via social media channels, including Form W-2 or more obscure ones such as Form 8944, Preparer e-file Hardship Waiver Request. These schemes urge taxpayers to submit inaccurate information in hopes of getting a refund and fall victim to identity theft in the process.  

9) Offer in Compromise Mills 

An Offer in Compromise (OIC) is an agreement between the IRS and a taxpayer to resolve the taxpayer’s tax debt. Unfortunately, OIC “mills” have grown in popularity, duping taxpayers into settling their debts for pennies on the dollar even if they know the taxpayer will not qualify. In turn, taxpayers are left paying up to thousands of dollars to dissolve a debt that wasn’t approved by the IRS, digging them deeper into debt in the long run. The IRS encourages taxpayers to use its Offer in Compromise Pre-Qualifier tool to determine if they qualify to avoid falling victim to this scam.   

10) Schemes Aimed at High-Income Filers 

The IRS urges high-income filers to be vigilant of these two schemes: 

  • Charitable Remainder Annuity Trust (CRAT): In this arrangement, taxpayers transfer appreciated property to a CRAT and claim a step-up in basis to fair market value if the assets had been sold to the CRAT. While the CRAT sells the assets, it doesn’t recognize gain since it depends on the step-up. As a result, the CRAT uses the proceeds from the sale to purchase a single-premium immediate annuity. The beneficiary only includes a small portion of the annuity proceeds in income and treats the rest as a tax-free return on investment. 
  • Monetized Installment Sales: Promoters target individuals looking to defer the recognition of gain upon the sale of appreciated property and create an abusive shelter by selling them monetized installment sales.  

11) Fake Tax Avoidance Strategies 

Here are two popular tax avoidance strategies the IRS is cautioning taxpayers about: 

  • Micro-captive insurance arrangements: Promoters convince owners of closely held entities to take part in scams lacking many attributes of insurance, such as not providing sufficient coverage or duplicating the taxpayer’s existing coverage. 
  • Syndicated conservation easements: Scammers take a provision of tax law for conservation easements and game the system to generate inflated and unnecessary tax deductions. 

12) Schemes with International Elements 

Rounding out the list are these three international schemes: 

  • Offshore accounts and digital assets: Individuals leveraging this scam evade U.S. tax by concealing income in offshore banks, brokerage accounts or nominee entities. Their funds are accessed via credit and/or debit cards, wire transfers, private annuities or structured transactions which hide the owner of the accounts.  
  • Maltese individual retirement arrangements misusing treaty: Certain taxpayers use an interpretation of the U.S.-Malta Income Tax Treaty to state they may contribute appreciated property tax-free to certain Maltese pension plans without tax consequence when the plan sells the assets and distributes proceeds to the U.S. taxpayer.  
  • Puerto Rican and foreign captive insurance: U.S. owners of closely held entities engage in a proposed insurance arrangement with a Puerto Rican or other foreign corporation with cell arrangements or segregated asset plans in which the U.S. owner holds a financial interest. The U.S.-based owner claims deductions for the cost of supposed “insurance coverage” provided by a carrier, reinsuring the “coverage” with the foreign corporation. Common characteristics of foreign captive insurance include implausible risk coverage, non-arm’s-length pricing and lack of business purpose for entering the arrangement.  

Stay Vigilant

The IRS Criminal Investigation Division is always on the lookout for both promoters and participants of all of the aforementioned scams. Since taxpayers are legally responsible for the contents of their returns, it’s important to think twice before engaging in questionable arrangements. If you believe you’ve fallen victim to a scam, you should contact the IRS immediately. As always, Doeren Mayhew’s tax advisors stand ready to help meet your business and personal tax needs. Contact us for assistance today.