IRS Releases ‘Dirty Dozen’ Tax Scams List

As the annual tax filing deadline nears, the IRS has released what the agency calls its “Dirty Dozen” list of tax scams.

While the IRS warns that many of the schemes peak during tax season, taxpayers, businesses, and tax professionals should be cautious throughout the year.

The agency warns that “in reality, these scams can occur throughout the year as fraudsters look for ways to steal money, personal information, data, and more.”

“Scammers are coming up with new ways all the time to try to steal information from taxpayers,” said IRS Commissioner Danny Werfel.

“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.

“And people should always remember to be wary if a tax deal sounds too good to be true.”

Dirty Dozen

Some items on this year’s list are new, while others are repeat offenders.

Employee Retention Credit claims: IRS officials originally issued a warning in October, but said they continue to see a number of attempts to claim the ERC credit during this 2023 tax season.

Scammers are promoting ERC opportunities and charging large fees upfront that are contingent on the amount of a refund.  Often, tax officials find the schemers do not inform taxpayers that wage deductions claimed on federal income tax returns must be reduced by the amount of the tax credit.  

“Additionally, some of these advertisements exist solely to collect the taxpayer’s personally identifiable information in exchange for false promises,” the IRS says. “The scammers then use the information to conduct identity theft.”

Phishing and smishing: Fake communications from those posing as legitimate organizations in the tax and financial community, including the IRS and the states, target businesses and individual taxpayers alike.

Messages arrive in the form of an unsolicited text (smishing) or email (phishing), and are designed to solicit valuable personal and financial information that can lead to identity theft.

“The IRS initiates most contacts through regular mail and will never initiate contact with taxpayers by email, text, or social media regarding a bill or tax refund,” the agency notes.

Online account help: Scammers pose as a “helpful” third party and offer to help create a taxpayer’s online account through the IRS website.

The IRS says no assistance is needed, and taxpayers should create their own accounts as “third parties making these offers will try to steal a taxpayer’s personal information this way.”

Fuel tax credit claims: The IRS has seen an increase in the promotion of filing certain refundable credits using Form 4136, Credit for Federal Tax Paid on Fuels.

Intended for off-highway business and farming use, the fuel tax credit is not available to most taxpayers although “unscrupulous tax return preparers and promoters are enticing taxpayers to inflate their refunds by erroneously claiming the credit.”

Fake charities: “Bogus charities are a perennial problem that gets bigger whenever a crisis or natural disaster strikes,” the IRS warns.

“Scammers set up these fake organizations to take advantage of the public’s generosity. They seek money and personal information, which can be used to further exploit victims through identity theft.”

Charitable donations only count as a tax deduction when directed to a qualified tax-exempt organization recognized by the IRS.

Unscrupulous tax preparers: The IRS warns taxpayers to watch for common warning signs, such as a preparer who charges a fee based on the size of a refund or refuses to sign the return.

“Avoid these ‘ghost’ preparers, who will prepare a tax return but refuse to sign or include their IRS Preparer Tax Identification Number as required by law,” the agency notes.

“Taxpayers should never sign a blank or incomplete return.”

Social media scams: Inaccurate or misleading tax information and schemes circulate on social media, often involving common tax documents like Form W-2 or more obscure ones like Form 8944.

“Both schemes encourage people to submit false, inaccurate information in hopes of getting a refund,” the IRS says.

“Taxpayers should always remember that if something sounds too good to be true, it probably is.”

Spearphishing and cybersecurity for tax professionals: The IRS is warning tax professionals about spearphishing attacks—a phishing attempt tailored to a specific organization or business—because of the greater potential for harm.

“A successful spearphishing attack can ultimately steal client data and the tax preparer’s identity, allowing the thief to file fraudulent returns,” the agency notes.

Offer in Compromise mills: The Offers in Compromise program helps those who cannot pay to settle federal tax debts.

“But ‘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,” the IRS says.

“A taxpayer can check their eligibility for free using the IRS Offer in Compromise Pre-Qualifier tool.”

Schemes Targeting High-Income Filers

• Charitable Remainder Annuity Trust: Charitable Remainder Trusts are irrevocable trusts that let individuals donate assets to charity and draw annual income for life or a specific period. Unfortunately, these trusts are sometimes misused by promoters, advisors and taxpayers to try to eliminate ordinary income and/or capital gain on the sale of the property.
• Monetized Installment Sales: In these potentially abusive transactions, promoters find taxpayers seeking to defer the recognition of gain upon the sale of appreciated property. They facilitate a purported monetized installment sale for the taxpayer in exchange for a fee.

Bogus Tax Avoidance Strategies

• Micro-captive insurance arrangements: A micro-captive is an insurance company whose owners elect to be taxed on the captive’s investment income only. Abusive micro-captives involve schemes that lack many of the attributes of legitimate insurance. These structures often include implausible risks, failure to match genuine business needs and, in many cases, unnecessary duplication of the taxpayer’s commercial coverages.
• Syndicated conservation easements: A conservation easement is a restriction on the use of real property. Generally, taxpayers may claim a charitable contribution deduction for the fair market value of a conservation easement transferred to a charity if the transfer meets the requirements of Internal Revenue Code 170. In abusive arrangements, which generate high fees for promoters, participants attempt to game the tax system with grossly inflated tax deductions.

Schemes with International Elements

• Offshore accounts and digital assets: The IRS continues to scrutinize attempts to hide assets in offshore accounts and accounts holding digital assets, such as cryptocurrency. The IRS continues to identify individuals who attempt to conceal income in offshore banks, brokerage accounts, digital asset accounts and nominee entities. Asset protection professionals and unscrupulous promoters continue to lure U.S. persons into placing their assets in offshore accounts and structures saying they are out of reach of the IRS. These assertions are not true. The IRS can identify and track anonymous transactions of foreign financial accounts as well as digital assets.
• Maltese individual retirement arrangements misusing treaty: These arrangements involve U.S. citizens or residents who attempt to avoid U.S. tax by contributing to foreign individual retirement arrangements in Malta (or potentially other host countries). The participants in these transactions typically lack any local connection to the host country. By improperly asserting the foreign arrangement as a “pension fund” for U.S. tax treaty purposes, the U.S. taxpayer misconstrues the relevant treaty provisions and improperly claims an exemption from U.S. income tax on gains and earnings in and distributions from the foreign individual retirement arrangement.
• Puerto Rican and foreign captive insurance: U.S. business owners of closely held entities participate in a purported insurance arrangement with a Puerto Rican or other foreign corporation in which the U.S. business owner has a financial interest. The U.S. business owner (or a related entity) claims a deduction for amounts paid as premiums for “insurance coverage” provided by a fronting carrier, which reinsures the “coverage” with the Puerto Rican or other foreign corporation. Despite being labeled as insurance, these arrangements lack many of the attributes of legitimate insurance.

Taxpayer Responsibilities

The IRS reminds taxpayers “they are legally responsible for what’s on their return, not a promoter making promises and charging high fees.”

“Taxpayers can help stop these arrangements by relying on reputable tax professionals they know and trust.”

The agency also encourages people to report individuals who promote improper and abusive tax schemes as well as tax return preparers who deliberately prepare improper returns.