Every year, the Internal Revenue Service (“IRS”) releases its “Dirty Dozen.” The Dirty Dozen, as written previously about by my colleague, Devin Mills,[1] is a list of twelve prevalent scams the IRS bodes taxpayers to be weary of during tax season, as they “put taxpayers, businesses, and the tax professional community at risk of losing money, personal information, data, and more.” On April 11, the IRS rounded out its 2024 Dirty Dozen with the addition of its penultimate and final items. While the Dirty Dozen generally varies from year to year, the 2024 Dirty Dozen remains completely unchanged from its previous year’s counterpart, and in its entirety, includes:
- phishing and smishing scams;[2]
- questionable Employee Retention Credit claims;[3]
- online scammers offering to “help;”[4]
- improper Fuel Tax Credit claims;[5]
- offer in compromise mills;[6]
- fake charities;[7]
- ghost preparers;[8]
- advice from social media;[9]
- spearphishing;[10]
- trap for high-income taxpayers;[11]
- bogus tax avoidance strategies;[12] and
- schemes involving international elements.[13]
This article will provide a brief summary of each of the twelve scams prevalent enough to earn a spot on the Dirty Dozen.
Phishing and Smishing Scams
Phishing is a practice used by shysters where they send an email claiming to be the IRS. These emails often include enticing promises of a tax refund or conversely, with threats of tax fraud. Likewise, smishing is a similar practice, except communicated via text message. Smishing texts often contain alerts such as “your account has been placed on hold” and contains a link to resolve the “issue.” While some links may require the input of personal information, and sometimes payment, other links are more covert, and install malware on your device to harvest your personal information. The IRS obviously urges taxpayers to never reply to these emails and texts or open any attached links, and requests taxpayers who receive these emails and texts to forward such to phishing@irs.gov.
Employee Retention Credit (“ERC”) Claims
The ERC is a refundable employment tax credit claimable by businesses who continued paying employees during the pandemic despite their business being fully or partially suspended due to government action in response to the pandemic, or suffered a decline in gross receipts during the eligible period. As noted in the 2023 Dirty Dozen, the availability of ERC claims lead to the emergence of several dubious promoters, who promise taxpayers eligibility for an ERC claim, and file such without regard to the complex eligibility requirements in exchange for a percentage of the received claim as compensation.
These questionable, or sometimes fraudulent, claims place taxpayers in danger of penalties, interest, and even potential criminal prosecution for filing an ERC claim to which they do not qualify. The IRS has taken aggressive action against these claims, even placing a moratorium on processing new claims filed after September 14, 2023. As the IRS continues its compliance efforts via audits and criminal investigations, it has instituted a voluntary ERC claim withdrawal process[14] for those taxpayers who have yet received or cashed their refund and a voluntary disclosure program[15] for those taxpayers who have received such refund. Note that the ability of taxpayers to only pay back eighty percent (80%) of their refund under the voluntary disclosure program ended March 22, 2024, and it remains to be seen if the IRS will extend such policy. Additionally, it is worth noting that the costs associated with undertaking ERC applications, including contingency fees taken by some promoters and the administrative costs of such applications, may prove greater than any received benefit, especially when considered in conjunction with the fines and penalties associated with claims that do not qualify for the ERC.
Online Scammers Offering to “Help”
The IRS remains concerned about online scammers offering to “help” taxpayers set up an online IRS account in an attempt to procure the taxpayer’s personal tax and financial information that can be used to commit identity theft. Specifically, these bad actors typically use the taxpayer’s information to file a fraudulent return whereby they receive an improper refund or will sell the information to third parties who do the same. Taxpayers will often be contacted by these scammers via email of text, stating there is a problem with the taxpayer’s account, exaggerating the complexity of creating or accessing an account, and overemphasizing the importance of needing outside help to resolve the issue. Taxpayers can easily create and access their own IRS account[16] and should be weary of any party offering “help” to do so.
Improper Fuel Tax Credit Claims
The Fuel Tax Credit is a credit available only to off-highway business and farming use and is not available to most taxpayers. Still, like the ERC, unscrupulous promoters mislead taxpayers as to their eligibility for such credit and in turn file fraudulent returns on behalf of the taxpayer claiming such credit in return an inflated fee. While these promoters are left with an exorbitant fee, it is the taxpayers who bear the risk of significant penalties, along with the responsibility to justify such claims, associated with the fraudulently filed returns.
Offer in Compromise (“OIC”) “Mills”
The OIC is an IRS program designed to help taxpayers who are unable to pay their entire federal tax debts or if doing so would create a financial hardship. As the name implies, in the OIC program, the IRS negotiates with taxpayers to settle a federal tax debt for less than the full amount owed. In determining eligibility for an OIC, the IRS considers the facts and circumstances of each individual taxpayer, and not every taxpayer will qualify.
Still, promoters advertise heavily on television and radio that they can settle any taxpayer’s federal tax debt for “pennies on the dollar,” without regard to the facts surrounding an individual taxpayer. These promoters in turn charge taxpayers excessive fees for services the taxpayer could easily have done themselves. For example, taxpayers can quickly determine their eligibility for an OIC via the IRS’s OIC Pre-Qualifier portal.[17] While there are certain businesses that run valid OIC programs, taxpayers should first consider determining their own eligibility for an OIC before paying promoters a fee. In addition, taxpayers may contact the IRS for administrative relief from a penalty under the IRS’s first time penalty abatement policy, available to taxpayers who have a history of compliance. The OIC process can prove complicated, and taxpayers would do well with engaging a trust tax professional to help them throughout the process, but the same taxpayers should be weary of those promoting OIC eligibility without considering the taxpayers’ individual facts and circumstances.
Fake Charities
The IRS warns of particularly immoral scams derived from real tragedy. In the wake of natural disasters and other tragic events, the IRS has seen criminals establish an organization, masquerade it as a charity, and receive contributions motivated by real compassion. In addition to these contributions, these criminals will also gather taxpayers’ personal information for identity theft purposes or sell such information for the same. The IRS is aware of these scams due to contributing taxpayers taking itemized charitable deductions for the amount donated to these fake charities. While charitable contributions are certainly itemized deductions, they are only available when they are made to a qualifying tax exempt organization. These fake charities, of course, do not qualify as such, leading the taxpayer to not only suffer the loss of funds and personal information, but also consequences related to an improper return. To avoid this scam, taxpayers should utilize the IRS’s Tax-Exempt Organization Search Tool[18] to check an organization’s eligibility to receive tax-deductible charitable contributions before making any contribution.
Ghost Preparers
Paid tax return preparers must sign and include a valid preparer tax identification number on every tax return they file. Ghost preparers are those who do not sign returns they prepare. “Ghost preparer,” as used by the IRS, is nothing more than a broad term designated for unethical preparers who will manipulate income and deductions, claim credits for which the taxpayer is ineligible, and do anything else needed to maximize the taxpayer’s refund. In return, the ghost preparer will receive outrageous fees, a commission based on the refund, or may even steal the entire refund.
The IRS provides taxpayers warning signs of ghost preparers, including shady fees (such as requesting cash payment), the willingness to manipulate income and deductions, and any attempt to deposit the taxpayer’s refund in an account other than the taxpayer’s. In short, if a preparer’s claims seem too good to be true, they probably are. At the end of the day, it is the taxpayer’s responsibility to ensure the information reported on his or her return is accurate. Likewise, it will be the taxpayer who was the victim of a ghost preparer required to substantiate any position taken on the taxpayer’s return and who will be subject to the consequences of an inaccurate return.
Social Media Advice
While this is hopefully not groundbreaking news, social media can lead to circulation of completely inaccurate information. While this applies to all aspects of life, the IRS particularly warns about wildly misleading or objectively false tax information and advice on social media. The IRS specifically notes “advice” circulated on social media to taxpayers to intentionally manipulate the numbers on their W-2 or to file Form 8944 (filed by a tax professional to file a paper, rather than electronic, return) in order to receive a larger refund. This is obviously inaccurate and dangerous. While this hopefully seems obvious, taxpayers should not take any position on their return based solely on information from social media.
Spearphishing
As mentioned previously, phishing refers to emails and text messages designed to directly steal personal information or by clicking on an embedded link or attachment. Spearphishing is a more targeted form of phishing, targeting specific individuals, organizations, and businesses. In the tax context, spearphishing often involves the targeting of tax professionals by scammers acting as potential clients, and may prove more dangerous, as the stolen data is not only that of the tax professional, but his or her clients, leading to multiple victims. Tax professionals should be weary of any communications that seem out of the ordinary, and the IRS urges the implementation of security software to protect client information.
Traps for High Income Taxpayers
As a taxpayer’s income increases, so too does the availability of certain tools and tax mitigation strategies, whose utility, due to the taxpayer’s income, is more beneficial than the associated costs. Unfortunately, as some tax planning strategies become more viable, so too does the opportunity for scammers and unscrupulous promoters to advocate for complicated, expensive “strategies” that do not in fact benefit the taxpayer. “Strategies” propounded by scammers specifically noted by the IRS include monetized installment sales (of which my colleagues and I have written about previously)[19], improper deductions related to the donations of art, and the implementation of a charitable remainder annuity trust, or CRAT, to “eliminate capital gain.”
Bogus Tax Avoidance Strategies
As was the case in the preceding year’s Dirty Dozen, the IRS again specifically bodes taxpayers to be weary of certain syndicated conservation easements and micro-captive insurance arrangements. Generally, a taxpayer may claim a charitable contribution deduction for the fair market value of a conservation easement if contributed to an eligible organization. The IRS warns taxpayers of conservation easement arrangements that purport to generate charitable contributions substantially exceeding the amount invested. While I personally do believe that legitimate, substantiated syndicated conservation easements are operating under the umbrella of Congress’s intent reflected in the Internal Revenue Code, taxpayers should be aware of the IRS’s position and the likelihood of audit upon partaking in a syndicated conservation easement. Section 170(h)(7), codified in Section 605 of the SECURE 2.0 Act, limited the charitable contribution deduction from a syndicated conservation easement to 2.5 times the investor’s basis, and it remains to be seen if such statute will curb the prevalence of such transactions.
A micro-captive insurance company is one whose owners elect to be taxed on the company’s investment income only. The IRS warns of abusive schemes where the relevant company lacks many of the attributes of legitimate insurance, involves implausible risks, the insurance does not match the business’s needs, and are many cases moot as the business is covered for such by a commercial policy. The premiums in many abusive schemes are excessive and not at arms-length. Like syndicated conservation easements, micro-captive insurance has been a focal point of IRS audits and investigation, and the IRS has seen some success in challenging such abusive schemes.
Schemes Involving International Taxpayers
Promoters still prey on taxpayers’ mistaken belief that moving assets to offshore accounts will shield such from the reach of the IRS. Such assertions are false, as the Foreign Account Tax Compliance Act, of FATCA, requires most taxpayers holding assets outside the United States to report such to the IRS and for foreign financial institutions to report directly to the IRS about financial accounts held by United States taxpayers. In short, you cannot legally avoid paying taxes solely by moving assets outside the country. Additionally, the IRS warns of promoters of Maltese individual retirement arrangements, who claim that a United States taxpayer may claim an exemption from federal income tax on gains and earning from a Maltese IRA by claiming it is a pension fund, as well as any promoter who promotes the use of digital currency as a method of hiding assets from the IRS.
Conclusion
In all eleven of the publications comprising the 2024 Dirty Dozen, without exception, the IRS advises taxpayers to consult with a “trusted tax professional” before taking any position on their return. This is extremely important, considering that in closing their 2024 Dirty Dozen, the IRS states it will challenge the purported tax benefits derived from the Dirty Dozen and other questionable arrangements and impose penalties when appropriate. If someone claims to have a solution to eliminate your tax liability in a way that seems too good to be true, it probably is. Be wary of snake oil, as you will be the one who pays the consequences of a shyster’s actions. In conclusion, there are certain tax mitigation strategies that when handled correctly, are perfectly legitimate. Unfortunately, many of these strategies are incorrectly applied by malign parties who seed to benefit themselves. Consult with a trusted tax professional when filing your return and when considering different avenues to mitigate your tax liability.
[1] https://esapllc.com/irs-dirty-dozen-2023/; https://esapllc.com/scams-and-dirty-dozen-2021/
[2] IR-2024-84.
[3] IR-2024-85.
[4] IR-2024-87.
[5] IR-2024-89.
[6] IR-2024-91.
[7] IR-2024-92.
[8] IR-2024-96.
[9] IR-2024-98.
[10] IR-2024-100.
[11] IR-2024-104.
[12] IR-2024-105.
[13] Id.
[14] https://www.irs.gov/newsroom/withdraw-an-employee-retention-credit-erc-claim
[15] https://www.irs.gov/coronavirus/employee-retention-credit-voluntary-disclosure-program
[16] https://www.irs.gov/payments/your-online-account
[17] https://irs.treasury.gov/oic_pre_qualifier/
[18] https://www.irs.gov/charities-non-profits/search-for-tax-exempt-organizations
[19] https://esapllc.com/monetized-installment-sale-2021/; https://esapllc.com/monetized-installment-sales-proposed-regulations-2023/
