Every year, the IRS issues a list of the top 12 scams and schemes for taxpayers to take caution to avoid. While the first of April marked the annual “April Fools” period, I don’t want you to be fooled by IRS scams. So, while your kids may have played tricks on you this year, here are the top 12 tax scams for you to avoid falling for.
The Dirty Dozen
Number 1: Employee Retention Credit
The Employee Retention Tax Credit (ERC) was a valuable tool during the pandemic to ensure that employers retained employees. While the program no longer exists, employers can still file amended returns to obtain the tax credit if they met the criteria. However, taxpayers should be cautious of organizations seeking to obtain such credit for a fee if they don’t meet the criteria for qualification. Taxpayers should understand that they are ultimately responsible for accurate tax reporting. Therefore, before you file your amended tax return, ensure that you fully understand the qualification criteria for the Employee Retention Tax credit.
Number 2: Email/Text Messages
We are used to getting spam through our email inbox, but the use of text message spam has significantly increased over the last couple of years. Like any scam, it’s important to make sure that you are verifying the sender and not clicking on links. Most communication from the IRS will come through regular mail. Unless you’ve initiated the contact, the IRS does not usually communicate via text message; the exception is the verification code for logging into your Online Account.
Number 3: Online Account Help
The IRS allows taxpayers to access their tax information online through the Online Account portal. The process to set up such an account is fairly straightforward, so it’s likely not necessary for a third party to need to assist you with setting up such an account. If your tax preparer needs access to your account, they can use the IRS E-Service program, which is a separate program for accessing client information. The tax preparer should obtain your permission to access your account through the E-Service program using IRS Form 2848, Power of Attorney, or Form 8821, Tax Information Authorization.
Number 4: Fuel Tax Credit
Tax credits allow taxpayers to reduce their tax obligations by using the credit against their calculated tax liability, sometimes resulting in a refund for taxes previously paid. However, most taxpayers are not typically eligible for the fuel tax credit. Taxpayers should make sure that they are asking significant questions from their tax preparer to ensure they understand their eligibility for any tax credits. While a nice refund is good, make sure you understand what steps or actions your tax preparer used to obtain the refund.
Number 5: Fake Charities
Giving to charity is not only the right thing to do but can provide a valuable tax benefit. However, it’s important to ensure that the charity that you’re giving to is a legitimate organization. All charitable organizations, except churches, are usually readily searchable through the IRS’s Tax Exempt Organization Search Tool. Make sure that you are verifying the organization’s information before giving or you might lose your charitable deduction.
Number 6: Shady Tax Preparers
Who you choose to prepare your tax return can have a significant impact on your tax bill. Most good tax return preparers are credentialed by a reputable organization. A tax attorney is usually licensed by the state Supreme Court, a Certified Public Accountant (CPA) is credentialed by a state board of accountancy or related entity and Enrolled Agents are credentialed directly by the Internal Revenue Service. It’s important to choose the right tax preparer because, ultimately, any liability or misinformation submitted on the tax return is the taxpayer’s responsibility, not the tax preparer’s.
Number 7: Tax Advice via Social Media
Social media can be a great way for tax professionals and others to share valuable information with the general public. However, social media can also lead to the receipt of information that may not be accurate or used out of context. Therefore, it’s important to understand the source of the information; does the voice have credentials in the tax space (tax attorney, CPA, Enrolled Agent), what is their area of expertise and can the information be readily fact-checked? Not every piece of tax advice is great tax advice!
Number 8: Spear Phishing
Identity theft and cyber security have become a growing concern in the tax space. Spear phishing is a phishing scam where a scammer appears to come from a reputable or trusted source but directly targets you in order to get you to click on a link or gain access to your information. Helpful tips to avoid being a victim include verifying senders before clicking on a link and not sharing sensitive information except through secure channels.
Number 9: Offer-In-Compromise Promotors
An Offer-in-Compromise can be a valuable way for taxpayers to resolve outstanding tax liability; however, relying on misleading advertising can cost you. The IRS has specific rules and criteria for qualifying for such relief, and this should be understood prior to the submission of an application. Taxpayers can use the IRS Pre-Qualifier tool and work with credentialed tax advisors to navigate through their options.
Number 10: Tax Schemes for High-Income Filers
Reducing your tax obligation ethically and legally is a legitimate reason to pursue creative tax savings. However, it’s important that the techniques are within the guidelines provided by the Internal Revenue Service or there is a “reasonable basis” for the tax position. The use of Charitable Remainder Annuity Trust or Monetized Installment Sales can be legitimate tax techniques based on a taxpayer’s particular circumstances. However, there are very specific rules and requirements necessary to use these tax strategies. Taxpayers should fully understand the requirements for these tax techniques and obtain advisory opinions before pursuing such tax techniques.
Number 11: Bogus Tax Avoidance Strategies
For several years, micro-captive insurance arrangements and syndicated conservation easements have been front-and-center for IRS compliance enforcement. A syndicated conservation easement can be a legitimate method for taxpayers to reduce their tax liability by donating the property to a charity but only if you meet the requirements, as outlined in IRS Code. Taxpayers should be wary of the use of individuals who promote these tax strategies for a high fee but are likely to leave taxpayers at risk. The use of these complex tax strategies should be pursued through the use of knowledgeable tax professionals.
Number 12: International Tax Compliance
US Citizens continue to have a tax compliance obligation to the United States even if they move to another country. IRS guidance requires US persons holding foreign assets or receiving foreign income to report such information on an annual basis. Foreign assets include offshore accounts and cryptocurrency. In addition, the use of foreign “pension funds” or foreign captive insurance should be appropriately scrutinized to ensure that it meets the requirements under the Code.
Protecting Yourself Against Tax-Related Scams
The Internal Revenue Service’s creation of the annual “Dirty Dozen” is a great opportunity for taxpayers to understand how to best protect themselves against tax-related fraud and scams. The IRS continues to step up its enforcement efforts to ensure compliance with tax obligations. Therefore, taxpayers should fully understand both their obligations and how to navigate tax law in order to avoid non-compliance. For support with understanding tax compliance or navigating through complex tax strategy, please contact a member of our Tax Practice Group, including Co-Chair Demetrius Robinson at (614.427.5749 or DJR@kjk.com).