Each year, the Internal Revenue Service (IRS) releases a list of twelve tax scams called the “Dirty Dozen” list. The goal is to increase taxpayer awareness of common schemes that target financial-related information. During filing season, there is often an uptick in these schemes because a tax return can contain information including bank account numbers, Social Security Numbers, and income information. Read below to learn about the 12 schemes to watch out for this year.
1. Phishing and Smishing Scams
Some of the most common scams are email phishing and text message smishing scams. This is when a fraudster poses as the IRS or other legitimate organization in the tax and financial community and sends an “urgent” message to try to get you to take immediate action without thinking. The message usually claims something exciting – like a big tax refund or something scary – like criminal charges. Then, the message tells you they have an easy way to get the refund or eliminate the charges. They’ll want you to take immediate action – such as clicking a link or providing personal information. You should never click on a link or respond to a message if you can’t confirm the sender. If you receive a message and you want to know its validity, the IRS has many resources for you. Check out their webpage on how to Report Phishing and Online Scams.
2. Bad Advice on Social Media
Social media is a place where opinions and ideas can be posted and quickly shared with no fact-checking to act as a safeguard that the content is accurate. It should not come as a surprise that people will post flashy but false content on social media hoping to get shares and likes. If you come across a post that promises a huge tax break or massive refund, be wary. In fact, five more items on the IRS Dirty Dozen list often stem from people getting bad advice from social media (see numbers 5 – 9).
Filing a fraudulent tax return can result in significant penalties, so before you claim a credit or deduction that you aren’t sure you are entitled to, be sure to do your own research on the topics and seek advice from a CPA.
3. Individual Online Account "Help"
The IRS has created an Online Account for Individuals where you can access your individual tax information to see any balances due, pending payments, previous tax records, and more. To set up this portal, you have to provide information including a photo of your drivers license and your Social Security Number. Scammers will make it seem like this account is difficult to set up and offer to help you, but the IRS provides simple instructions so that most people can set it up without any assistance. Do not provide personal information to someone claiming they can help – they are likely trying to steal your information.
4. Fake Charities
Unfortunately, fake charities are an ongoing and year-round problem. You will see an increase in fake charities around the holidays as well as when a crisis or natural disaster occurs. The fraudsters may be after more than just money in the form of a donation though. They may be more inclined to steal credit card or bank detail information. Before you make a donation, you can use the IRS Tax Exempt Organizations online portal to see if the organization asking you for money is verified.
5. False Fuel Tax Credit Claims
A growing concern is the increase of misleading credit-based advice. This advice generally comes from promoters on social media and untrustworthy/inexperienced tax return preparers who are trying to convince taxpayers that using their services will result in a big refund. This false information is shared on social media to get people excited about an inflated refund.
One example of this is the Fuel Tax Credit. This credit is for off-highway business and farming use and is not available to most taxpayers. But on social media, you will see advice saying anyone can take advantage of it. If you file a return and falsely claim this credit, you can be subject to a penalty of $5,000 for each return claiming it, so it’s best to complete your own research or reach out to a verified tax preparer before you file.
The IRS has seen an increase in the promotion of filing refundable credits and providing false information, with more examples (see numbers 6, 7, 8, and 9) making their Dirty Dozen list.
6. Credits for Sick Leave and Family Leave
In 2020 and 2021, there was a specialized credit available for self-employed individuals during the pandemic – but the credit is not available for later tax years. The IRS is seeing repeated instances where taxpayers are incorrectly claiming this credit based on income earned as an employee and not as a self-employed individual.
7. Bogus Self-Employment Tax Credit
This credit does not exist. However, advice circulating on social media continues to promote a “Self-Employment Tax Credit” that claims self-employed people and gig workers can receive big payments for the COVID-19 pandemic period.
This scam is actually modeled after the credit listed in #6 that was available in 2020 and 2021 called Credits for Sick Leave and Family Leave. As stated, that credit is no longer available and many people simply do not qualify for it. The IRS is closely reviewing returns that include claims for this credit.
8. Improper Household Employment Taxes
This is when a promoter or preparer suggests that taxpayers “invent” fictional household employees and then file a Schedule H to claim a refund based on false sick and family medical leave wages they never paid.
9. Overstated Withholding Scam
In the Overstated Withholding Scheme, a bad actor suggests people make up large income and withholding amounts as well as the fictional employer supplying those amounts. In this scenario, you would fill out a form, such as a W-2, Form 1099-NEC, or other 1099s, with false income and withholding information. There are multiple variations of the overstated withholding credit scheme, including those involving Forms W-2 and W-2G; Forms 1099-R, 1099-NEC, 1099-DIV, 1099-OID and 1099-B; as well as the Alaskan Dividend Fund, Schedule K-1 with Withholding Reported, and Unspecified Source of Withholding Credit Claimed.
However, if the IRS cannot verify the wages, income or withholding credits entered on the tax return, the refund will be held pending further review. The legal consequences of filing a fake return include having to pay penalties, complete a compliance audit, or even criminal prosecution.
10. Misleading Offers in Compromise
The IRS has a program called Offers in Compromise (OIC) that allows qualified taxpayers to settle their tax debt for less than the full amount owed. It is a legitimate option if you can’t pay your full tax liability or doing so creates a financial hardship, but you have to meet certain criteria to qualify and the IRS works directly with individuals who want to apply for this program. A taxpayer can check their eligibility for free using the IRS Offer in Compromise Pre-Qualifier tool.
For this fraud scheme, someone claims they can be the middle-man to help you lower your tax bill. The fraudsters will charge you a fee, but “guarantee” that you will receive a settlement or tell you that there is only a limited window of time to take advantage of this program. This can end up costing you thousands of dollars and in the end, you won’t have any resolution to lower your tax bill either. Read more about the IRS warning against the OIC fraud here.
11. Ghost Tax Return Preparers
If you are not using a Certified Public Accountant or accounting firm to prepare your taxes, please be careful of untrustworthy tax professionals. There are people who pose as tax preparers who will charge you a fee and never file for you, or they will steal your sensitive information, or they may even file a false return. Here are common signs that a person should not file your tax return:
- They charge a fee based on the size of your refund.
- They require cash-only payments and don’t provide a receipt.
- They are unwilling to sign the return.
- They are promoting themselves in senior and underserved communities and saying they can get a bigger refund.
- They encourage the use of the fake credits listed above.
- They encourage you to deposit your refund in their bank account instead of your own.
Anyone who is paid to prepare a return must sign the return and include their IRS Preparer Tax Identification Number (PTIN), as required by law. Taxpayers should never sign a blank or incomplete return. Instead, the IRS reminds taxpayers to turn to a trusted tax professional for help.
12. New Client Scams and Spear Phishing
This item is a note of caution for tax professionals. In the “new client” scam a cybercriminal sends a spear phishing email pretending to be a new, potential client to trick tax professionals and other businesses into responding to their emails. Once the tax pro responds, the scammer sends a malicious attachment or URL that can compromise the preparer’s computer systems and allow the attacker to access sensitive client information.
All business owners are at risk for Business Email Compromise (BEC) and should look out for any suspicious requests or unusual behavior before sharing any sensitive information or responding to an email. Read our blog on Business Email Compromise to learn the warning signs and what you should do if you receive a phishing email.
Report Schemes and Avoid Being a Victim
Our blog here
Schemes develop and evolve constantly, so we urge taxpayers to be extra cautious when it comes to sharing personal and financial information. If you encounter someone engaging in any of the examples above, the IRS asks you to report abusive tax schemes as well as tax return preparers who deliberately prepare improper returns.
To report an abusive tax scheme or a tax return preparer, people should use the online Form 14242 – Report Suspected Abusive Tax Promotions or Preparers, or mail or fax a completed Form 14242 PDF and any supporting material to the IRS Lead Development Center in the Office of Promoter Investigations.
Taxpayers and tax practitioners may also send the information to the IRS Whistleblower Office for a possible monetary award
Taylor Clinkenbeard, CPA
Taylor is a Manager in our tax and client accounting services teams. She has developed specific expertise in software, accounting processes, and tax laws to serve our clients.
