Beware the ‘Dirty Dozen’ Tax Scams

Tax scams are a cruel reality of today’s world—but with a little knowledge, you can fight back. Americans lost $5.7 billion to tax scams and fraud in 2022, not to mention the personal information and protected corporate data that fraudsters also managed to bilk. These scams, orchestrated through mail, telephone, and email, don’t discriminate, targeting everyone from individuals to businesses—even those in the payroll and tax professions. It’s crucial to recognize that these schemes exist and understand how they operate. That’s why, every year, the IRS highlights the “Dirty Dozen”: 12 tax scams that are actively targeting taxpayers. From the classic phone scam to more sophisticated email phishing, being aware of these scams is the first step in protecting yourself. In the following sections, I will dive into each of these scams, identifying their telltale signs and distinguishing them from legitimate IRS contact attempts. I’ll also guide you on what actions to take to halt these scams in their tracks and how to report them effectively.  And remember: Tax scams aren’t just a tax-season phenomenon. While they tend to peak during the tax filing season, they can happen at any time of year. So always be vigilant.

What Is a Tax Scam?

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Tax scams are deceptive schemes that trick taxpayers into paying money or divulging sensitive personal information. These scams, cloaked in various guises, can arrive via email, telephone, or even regular mail. They prey on individuals, businesses, and even tax professionals. Tax scams prey on fear and/or ignorance. Maybe it’s promising benefits like too-good-to-be-true tax savings. Or maybe it’s posing as a government authority and threatening consequences if you don’t comply. Understanding how these scammers go about their business is your first line of defense. Below, we’ll cover the Dirty Dozen scams as reported by the Internal Revenue Service (IRS) for the 2023 tax season, then provide their recommendations on preventing falling victim to each tax scam.

1. Employee Retention Credit Claims

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The Employee Retention Credit (ERC) is a refundable tax credit for certain eligible businesses and tax-exempt organizations that had employees and were affected by the COVID-19 pandemic. Businesses used this credit as added financial assistance during the pandemic to keep employees on their payroll. But because claiming the credit results in large payouts, a cottage industry of scammers sprang forth, targeting businesses with opportunities to “apply” for money by claiming the ERC when they may not actually qualify. You’ve probably heard or seen their ads–they’re all over the radio, television, social media, and the internet (even in your email inbox). You might even get ads that look like official letters from the IRS, or texts and phone calls advertising ERC eligibility. They boast about hefty tax refunds through the ERC, but here’s the catch: Many of these pitches target people who aren’t even eligible for the credit. The ERC scam strategy is simple yet effective. They hook you with the promise of big returns, but their claims often rest on shaky ground, with misinformation about who qualifies for the credit and how it’s calculated. These fraudsters typically work by charging large upfront fees to claim the credit for you and then use pressure tactics to accept their offer of a refund anticipation loan. They’ll charge fees based on a percentage of the tax refund amount of the ERC claimed on your tax return. (As a note, you should always avoid a tax preparer who bases their fee on the amount of the refund you can expect to get.) Also, some of these scams exist to steal your personal details under the guise of helping you claim these credits. And once they have your information, they pivot to their real goal: identity theft. Worse? There are IRS-level consequences of falling for this scam. Namely, if you claim the credit on your tax return but don’t actually qualify, you may owe penalties and interest.

How to Avoid Getting Scammed: Employee Retention Credits

First off, it helps to know the ERC eligibility criteria. Generally, to be eligible, you needed to have eligible employees that you paid qualified wages to after March 12, 2020, and before Jan. 1, 2022. The IRS provides an ERC checklist to determine your eligibility before proceeding with a claim. Other red flags to watch out for: — Stating you’ll qualify for the credit before having any discussion about your tax situation — Urging you to submit the claim because there’s nothing to lose — Lying about eligibility requirements The IRS has stepped up enforcement through adding staff to handle ERC claims, which are time-consuming to process. IRS Commissioner Danny Werfel says, “This continual barrage of marketing by advertisers means many invalid claims are coming into the IRS, which means … [we work] hard to get valid claims processed as quickly as possible while also protecting against fraud.” In other words, you need to be on high alert for the ERC scam. Related: Federal Tax Brackets and Rates

2. Tax Scams Using Email and Text Messages During Tax Season

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Phishing and smishing scams are modern-day digital traps set by criminals. Scammers pretend to be from reputable sources in the tax and financial world, sometimes even masquerading as the IRS or state tax agencies. Their intent is to use social engineering to get personal information from you that can then be used to steal your money or engage in identity theft. Here’s how these tax fraud schemes tend to operate: You receive an unexpected email (phishing) or text (smishing, which is a term adapted from fraud perpetrated through SMS text messages, or short message service), seemingly from these official entities. These messages are cleverly designed to trick you into revealing personal and financial information. And once they have this data, they’re a step closer to committing identity theft. “Email and text scams are relentless, and scammers frequently use tax season as a way of tricking people,” Werfel says. “With people anxious to receive the latest information about a refund or other tax issue, scammers will regularly pose as the IRS, a state tax agency or others in the tax industry in emails and texts.”

How to Avoid Getting Scammed With Phishing And Smishing

It’s important to know that the IRS almost always contacts taxpayers via regular mail. The IRS will never attempt to contact you through other means “unless you specifically asked them for a callback to answer your tax question,” says Jeff Sakasegawa, Trust & Safety leader for identification verification solutions provider Persona. “If the IRS calls, texts or emails you, it’s not the IRS. Any call or text out of the blue from the IRS is fake.” These scams are particularly insidious because they wear the mask of legitimacy. Stay vigilant and think twice before responding to or sharing information with unknown or unexpected digital correspondences. Your caution is a powerful shield against these digital predators. “People should be incredibly wary about unexpected messages like this that can be a trap, especially during filing season,” Werfel says. Related: How to File a Tax Extension [Postpone Your Taxes]

3. Offering “Help” to Set Up an IRS Online Account

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Beware of the crafty scam where swindlers pose as “helpful” third parties and offer to set up your IRS Online Account, which provides valuable tax information to people. Here’s the twist: You don’t need their help. “Scammers are coming up with new ways all the time to try to steal information from taxpayers … and scammers are trying to convince people they need help setting up an account,” Werfel says. “In reality, no help is needed. This is just a scam to obtain valuable and sensitive tax information that scammers will use to try stealing a refund.”

How to Avoid Getting Scammed With Your IRS Online Account

Preventing this scam is as simple as taking action into your own hands. Set up your own account on IRS.gov. This DIY task will keep your information safe, and the site is simple and secure. Remember: When it comes to your personal tax data, it’s smart to trust no one but yourself, your trusted accountant, and the official IRS website. Stay sharp and steer clear of these deceptive offers. Your vigilance is the key to safeguarding your personal information. “People should be wary and avoid sharing sensitive personal data over the phone, email or social media to avoid getting caught up in these scams,” Werfel says. Related: How Are Social Security Benefits Taxed?

4. Third-Party Promoters of False Fuel Tax Credit Claims

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The price of gas includes a federal gas tax—18.4 cents per gallon in 2024—that helps road projects around the country. However, under certain circumstances, you might not be required to pay this tax, enabling you to receive a credit on your taxes if you did. Generally, unless you have some specific business needs that separate you from the usual motorway gasoline needs, you won’t qualify for this tax credit. In particular, you’ll only qualify if you buy gasoline for off-highway business, commercial aviation, or farming use of a vehicle. In other words, the vast majority of the American public wouldn’t qualify to claim this tax credit. But that doesn’t stop scam artists from making false promises that you can—and offering to help you claim these on your return for a price. In this tax scam, a third party works to convince you to claim the credit fraudulently with promises of a windfall tax refund for doing so. Of course, this isn’t the main focus of the “advice”; rather, the third party takes advantage by charging costly fees and possibly even taking your personal information to conduct identity theft.

How to Avoid Getting Scammed With the False Fuel Credit

Before taking the bait on this credit, make sure you seek a second opinion—preferably from someone you trust. A simple Google search will provide high-level details of the credit and tell you fairly quickly that you more likely than not don’t qualify for this particular credit. On top of that, if you’ve used a tax preparer in the past and not taken the credit on previous returns, that’s usually a good indication you might not qualify to claim the credit on this year’s return. (This assumes your tax situation has remained static with prior years.) Related: Do You Have to File Taxes This Year?

5. Fake Charities

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Scammers know no boundaries, taking advantage of people’s good nature by exploiting people through setting up fake charities. Scammers set up these fake charities during times of crisis or disaster, when goodwill spikes and donations are most likely to pour in. They either mimic the names and branding of legitimate charities, or make up charities, to solicit donations via phone, email, or in person. These fraudulent operations often request donations in cash or via wire transfers, offering limited or no verification information about their organization. Not only do they pocket the funds—stealing from you and diverting resources away from genuine charitable efforts—they sometimes also use the opportunity to capture personal information, which can lead to tax-related identity theft. Also, if you itemize and were hoping to claim a deduction on your federal tax return, but you sent money to a scam organization, you’re out of luck—the IRS says “charitable donations only count if they go to a qualified tax-exempt organization recognized by the IRS.

How to Avoid Getting Scammed With Fake Charities

Fake charities may use many different methods to solicit donations, usually applying pressure to give quickly. The IRS has a list of tips that can protect against fake charity scams. Per the IRS: — Don’t give in to pressure. Scammers often use a tactic focused on an urgent need to pressure people into making an immediate payment. Legitimate charities are happy to get a donation at any time; so, people should feel no rush. Donors are encouraged to take time to do their own research. — Verify first. Scammers frequently use names that sound like well-known charities to confuse people. Potential donors should ask the fundraiser for the charity’s exact name, website and mailing address so they can independently confirm it. You can check a charity’s identity at sites such as Charity Navigator, which provides information on legitimate charities, or online state databases. — Be wary about how a donation is requested. Taxpayers should never work with charities that ask for donations by giving numbers from a gift card or by wiring money. That’s a scam. It’s safest to pay by credit card or check—and only after verifying the charity is real. — Don’t give more than needed. Scammers are on the hunt for both money and personal information. Taxpayers should treat personal information like cash and not hand it out to just anyone. They should never give out Social Security numbers, credit card numbers or PIN numbers, and they should give bank or credit card numbers only after they’ve confirmed the charity is real. Related: Tax Preparation Checklist [Get Your Tax Documents In Order]

6. Unscrupulous Tax Preparers

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An unscrupulous tax preparer, as the IRS warns, engages in unethical practices that can jeopardize a taxpayer’s financial and personal security. A shady tax preparer can cause significant harm by engaging in dishonest practices, such as filing inaccurate returns to inflate refunds, charging excessive fees based on refund size, or even committing identity theft by misusing personal and financial information. Such actions not only risk audits, penalties, and legal issues for taxpayers, but also erode trust in tax professionals, making it crucial to choose carefully and verify the credentials of any tax preparer.

How to Avoid Getting Scammed By an Unscrupulous Tax Preparer

Key warning signs include refusing to sign a tax return, asking clients to sign a blank return, charging fees based on the size of the refund, and lacking an IRS Preparer Tax Identification Number (PTIN). To avoid falling victim to such unscrupulous individuals, taxpayers are advised to: 1. Choose a tax preparer carefully. Just as one would carefully select a doctor or lawyer, choosing a tax preparer requires diligence. Taxpayers should consider the preparer’s credentials, qualifications, and whether they meet their specific needs. 2. Verify the preparer’s credentials. Tax professionals must have a valid PTIN to legally prepare federal tax returns. The IRS provides a Directory of Federal Tax Return Preparers with Credentials and Select Qualifications to help taxpayers find qualified professionals. 3. Ensure transparency and honesty. To the best of your ability, you’ll want to avoid preparers who claim fake deductions, invent income to qualify for tax credits, demand cash payments without receipts, or direct refunds to their account instead of the taxpayer’s. Related: Does My Child Have to File a Tax Return?

7. Tax Advice From Social Media

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Relying on tax advice from social media can be misleading and potentially hazardous to you. The IRS warns that social media platforms can circulate inaccurate or fraudulent tax information, leading honest taxpayers into compromising situations. While these scams might not necessarily be attempting to solicit money from you by scammers, the advice given can be shady—and even make you unwittingly become a scammer yourself. Some previous poor advice highlighted by the IRS might suggest submitting false information on forms like W-2s for unjust refunds or misuse of specialized forms like Form 8944, intended for tax professionals, not the general public.

How to Avoid Taking Tax Advice From Social Media

The easiest solution to this problem is to avoid taking any financial advice from social media and exhibiting self-restraint from acting on it. If you do come across something on social media that you think might apply to you, turn to trusted sources such as tax professionals, reputable tax software, and IRS.gov to learn more. These should always be your first choice for tax guidance. Related: Tax Day 2024: When Is the Last Day to File Taxes?

8. Spearphishing

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Spearphishing is an advanced form of phishing discussed above that targets specific organizations or businesses. Unlike broad phishing and smishing attacks, spearphishing is highly customized to deceive a particular group of people—such as tax professionals or business employees, in the case of tax scams—into divulging sensitive information. These attacks often start with an email or message that seems legitimate, perhaps mimicking a tax preparation service or another professional tool. They sometimes even use official logos like that of the IRS to create a sense of urgency. Spearphishing attackers meticulously craft emails that may direct the target to click on a link or download an attachment under the guise of verifying information or addressing an urgent issue. The goal is to steal client data and/or tax preparer identities, and ultimately, to file fraudulent returns or gain unauthorized access to sensitive tax-related information. Tax professionals, businesses (especially those in payroll or accounting departments), and indirectly, taxpayers, are at high risk of being targeted and exploited by these scams.

How to Avoid Being Spearphished

To protect yourself and your organization from spearphishing attacks, consider the following tips: — Avoid suspicious links. Never click on links or download attachments from unverified emails. — Verify requests. Always double-check email requests by contacting the sender through official channels. — Maintain year-round vigilance: Be cautious of phishing attempts throughout the year, not just during tax season. — Implement a two-person review process: For critical requests like those for W-2 information, use a two-person review system to validate the authenticity of the request. — Use official channels for requests: Encourage the use of established, official processes for submitting and receiving sensitive information, such as through a company’s human resources portal. Related: Capital Gains Tax: What Is It, Rates, Home Sales + More

9. Offer-in-Compromise “Mills”

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An “offer in compromise” (OIC) with the IRS is a program that allows taxpayers to settle their tax debt for less than the full amount they owe—sometimes at a pretty steep discount. It’s designed for individuals who are unable to pay their full tax liability, or doing so would create financial hardship. This program reflects the IRS’s acknowledgment that in certain cases, collecting the full amount of tax owed would be unfair or not feasible. Because settling your debt for less than you owe can seem enticing, there are scammers who intentionally misrepresent the qualifications needed to receive an approved OIC from the IRS (dubbed “OIC mills”). Sadly, taxpayers who fall for these scams can end up paying excessive fees to these scammers for information they could have gathered themselves. Per the IRS, these so-called OIC mills “can aggressively promote offers in compromise in misleading ways to people who clearly don’t meet the qualifications, frequently costing taxpayers thousands of dollars.”

How to Avoid Being Scammed by Offer-in-Compromise Mills

“This is a legitimate IRS program, but there are specific requirements for people to qualify,” Werfel says. “People desperate for help can make a costly mistake if they clearly don’t qualify for the program. Before using an aggressive promoter, we encourage people to review readily available IRS resources to help resolve a tax debt on their own without facing hefty fees.” To apply for an OIC, taxpayers must submit an application to the IRS, demonstrating that their tax debt exceeds their ability to pay. This involves providing detailed financial information through IRS Form 656, the Offer in Compromise, and in some cases, Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, which detail the taxpayer’s financial situation. The IRS considers several factors when evaluating an OIC application: — Ability to pay: An assessment of the taxpayer’s income, expenses, and asset equity. — Income: Both current and potential future income are considered. — Expenses: Necessary living expenses are factored into the evaluation. — Asset equity: The value of the taxpayer’s assets is considered as part of their ability to pay the tax debt. Related: Kiddie Tax: What Is It, Who Must Pay, How Much + More

10. High-Income Filers

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Two schemes target high-income filers: Charitable Remainder Annuity Trusts and Monetized Installment Sales. I will talk a bit about each of these next.

Charitable Remainder Annuity Trusts

Charitable remainder annuity trusts (CRAT) are a type of irrevocable trust that allows individuals to donate assets to charity but also draw annual income from the fund either for life or a specific period of time. Trustees might file an annual information return, Form 5227, Split-Interest Trust Information. Trustees use the form to report financial activities of the trust, including the disposition of the trust’s assets as well as current-year and accumulated trust income. Promoters often tout the benefits of these trusts as ways to avoid paying the appropriate taxes due on any taxable gains or income. One such instance is the transfer of property with a fair market value in excess of its basis into the trust. The IRS states that “taxpayers may wrongly claim the transfer of the property to the CRAT results in an increase in basis to fair market value as if the property had been sold to the trust. The CRAT then sells the property but does not recognize gain due to the claimed step-up in basis. Next, the CRAT purchases a single premium immediate annuity (SPIA) with the proceeds from the sale of the property.” By misapplying the rules, the taxpayer or beneficiary may treat the remaining payment as an excluded portion of the investment, thus determining no tax is due on the sale. This is a sophisticated tax vehicle and requires assistance from a trusted tax professional. Before proceeding with the formation of a CRAT, consult a tax professional and be wary of anyone trying to persuade you into such an arrangement if you don’t feel comfortable.

Monetized Installment Sales

Installment sales allow the buyer to pay for an asset over several periods—months or years—deferring the recognition of gain upon sale of property if it has appreciated in value. Some promoters will enable such an installment sale for a fee if the buyer believes it will spread out the tax liability if spread over multiple years. The process works like this: An intermediary purchases appreciated property from the seller and, instead of providing them with proceeds of the entire sale, offers an installment note. The note generally carries interest payments with the full principal amount paid when the note matures. The seller thus receives the majority of the appreciated property’s value but delays paying taxes until the final payment arrives on the installment loan. Many promoters advertise such arrangements as a way to reduce your tax liability or defer it down the road in exchange for fees. You should carefully review any such offer and legal requirements associated with them. Consult a tax professional before proceeding with any arrangement that monetizes an installment sale. Related: 11 Ways to Avoid Taxes on Social Security Benefits

11. Abusive Tax Avoidance Schemes

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There are two common types of tax avoidance schemes the IRS considers abusive: micro-captive insurance agreements and syndicated conservation easements. I will discuss them below.

Micro-Captive Insurance Agreements

A captive insurer is generally an insurance company that’s wholly owned by the people who use the company to insure themselves, similar to a co-op or mutual. The customers own the company itself and use it to insure their own risks while also benefiting themselves with any underwriting profits. A micro-captive is a very small captive, with the total limit being $2.2 million on the annual premiums allowed to be collected. Under a micro-captive insurance agreement, the company owners choose to be taxed on the investment income generated from the policies only. There are abusive tax schemes that fail to attribute the appropriate features of a legitimate insurance policy. Among the many abusive means for avoiding taxation on these agreements, one common ploy is that the premiums paid on these arrangements are often excessive and reflect pricing that wasn’t conducted at arm’s length.

Syndicated Conservation Easements

A conservation easement allows landowners to give up development rights for their acreage in exchange for a charitable tax deduction equal to the property’s development value. Congress deemed this necessary because in exchange for the landowner giving up the rights to develop a piece of property into something of commercial value, such as residences or commercial properties, the land is kept as is and presumably the public would benefit. In some cases, the land is made available as a park for people to enjoy. The schemes involved in taking advantage of these are complicated but essentially boil down to something like this: Promoters purchase idle land that isn’t being used and then hire an appraiser to assess the land as being far more valuable than the price originally paid by the promoters. Then, the promoters market this value to wealthy investors who can claim the charitable tax deduction worth many multiples of their original investment in the otherwise idle property. In return for this effort, promoters often reap considerable amounts of money in fees. A 2023 government funding bill passed with a provision to shut down abusive conservation easement transactions. Still, this abusive practice can be something worth watching out for as a taxpayer so you don’t get caught off guard trying to participate. Related: What Is the Standard Deduction?

12. International IRS Tax Scams

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The IRS also warns about tax scams that involve using international banks and other institutions to shield their assets from taxation.

Offshore Accounts and Digital Assets

The allure of hiding assets and income from the government’s taxing authority has been around long before the formation of the IRS. The wrinkle with today’s efforts is the ability to hide assets offshore or as digital assets conceivably outside the IRS’s knowledge and purview. Well, as you can imagine, the IRS doesn’t take too kindly to people using creative means to conceal their assets and income from them and pay special attention to certain types of financial items, such as structured transactions, private annuities, foreign trusts and other arrangements used to conceal taxable income, beneficial owners and assets. Despite extra enforcement from the IRS, promoters continue to persuade Americans of their ability to hide assets in offshore accounts, conceivably untraceable digital assets like crypto or NFTs, or other structures. While of varying degrees of sophistication, these all share one trait in common: promising tax savings to taxpayers that are too good to be true.

Maltese Individual Retirement Arrangements Misusing Treaty

Malta is merely one nation that allows foreigners to contribute to individual retirement arrangements, many such countries exist with similar legal provisions. In the case of Malta, many promoters sell Americans on the ability to establish a “pension fund” in Malta under U.S. tax treaties, often misconstruing the actual rules of said treaties and thus falsely claiming an exemption from U.S. income tax on gains from assets held in the account. If discovered by the IRS and found to be in violation of the tax treaty, severe consequences could result for you. Related: Saver’s Credit: What Is It, How Much, Who’s Eligible + More