Top 12 Tax Scams to Avoid Even After Tax Season
You may think there is nothing to fret about now that the tax season is over. Newsflash: Fraudsters are always plotting ways to trap taxpayers in tax scams. While it is true that their lucrative schemes are at their peak during filing season, that doesn’t mean they are sitting idle the rest of the year.
Considering this, the Internal Revenue Service (IRS) compiles a yearly list titled “Dirty Dozens” that brings forward the worst tax scams. The index aims to raise awareness among tax filers to avoid being trapped in scammers’ malicious schemes [1].
However, people still fall into the net set by these con-stars and lose millions of dollars. According to the annual report 2022, the IRS identified $5.7 billion in tax fraud [2] alone, which is alarming. Therefore, it’s crucial to be up-to-date and stay vigilant with the fraudsters’ tactics to avoid being a victim of them.
The best way to ensure you stay caught up on all the scammers’ strategies is to hire a remote bookkeeper to facilitate and guide you in these areas. Their expert knowledge and guidance would facilitate you in dodging scams. In this article, find the top scams you should beware of in this fast-growing digital world to keep yourself and your money safe. Let’s delve deeper and discuss these scams in detail to familiarize yourself, which will help you avoid them like a pro!
1. Employee Retention Credit Scam
Employee Retention Credit Scam (ERC) was introduced in Covid times as part of the Coronavirus Act, Relief and Economic Security (CARES) Act in 2020, and is the most common scam in recent years. IRS clearly warns to avoid aggressive promotions on radios, online, media, and flyers concerning ERC claims.
Fraudsters know that the handling of taxes brings lots of anxiety to taxpayers, so they leverage their vulnerability and strike them when they are under so much stress. Scammers approach filers through advertisements or promotions and promise big refunds, which sounds very appealing. If something sounds too good, it’s probably not true.
However, while bragging about the rebates, they don’t disclose all the details to the taxpayers, such as how much the employer will receive after the wage deductions or whether they are eligible to apply. Most of the time, they charge an upfront fee while promising a bigger return, while others say their fee is a percentage, for instance, 20% of the reimbursed amount. In both cases, the taxpayer is being conned.
Knowing the background behind this pandemic-era credit is essential to understand how to save yourself from this scam. Think of it as the financial assistance by the government to the employers whose businesses shut down or experienced a significant decline in revenue but still kept their employers on the payroll in these difficult times.
While the pandemic has ended, all those whose businesses suffer losses from March 13, 2020, to December 31, 2021, are eligible for this credit. There are stringent guidelines on the eligibility criteria [3], so thoroughly review them before filing for the ERC claims because the filer is ultimately responsible for the accuracy of the information. The IRS is actively conducting criminal investigations, and one wrong claim can result in severe penalties.
2. Phishing and Smishing by IRS Posers
Another standard method scammers use to get sensitive information like name, social security number, money, and sometimes both are by repeatedly calling or sending texts and emails. An important thing to remember here, the IRS never initiates contact via emails, texts, or calls. They use an old method of communication – regular mail to contact the taxpayers and have given clear instructions not to entertain these cybercriminals.
Scam artists often employ the technique of phishing (email attacks), where they try to impersonate legitimate authorities, like the IRS itself. The emails are crafted with a threatening subject headline urging you to take some action, such as clicking on a given link. Once you click, they may redirect you to a page that asks for your data, as mentioned above. Don’t provide details at any cost because this is not the IRS.
Similarly, when fraudsters approach you via simple text and phone calls, it is known as smishing. Now that the digital world is ruling, it’s easy for these thieves to barge into your social media apps. Usually, the texts sound like “your account has been blocked.” Calls could be anything from saying you are entitled to tax returns, asking you to pay money, or providing personal data to help you file for a refund.
Threatening remarks are also made, like “You’ll be fined, or worse, you can end up in jail .” Some scammers are so clever as when they call you, they tell you your name, date of birth, and other things to make you trust them. Whatever the case, hang up the call when you get a whiff of these con artists.
3. An Online Account “Help”
Fraudsters offer to “help” tax filers in setting up their IRS online account at irs.gov. Scammers come forward as third parties and offer to assist you while the intent is malicious.
If you get tricked into it, they play their next card and ask you for personal data, including photo identification, SSN (social security number) or ITIN (individual taxpayer identification number), address, and other sensitive data. Once they have your information, they can steal refunds, file fraudulent tax returns in your name, obtain loans, commit identity theft, and open credit accounts.
IRS always recommends not using any third-party assistance and creating your online account to avoid being a victim of this scam.
4. Fuel Tax Credit
In this scam, dishonest tax preparers and promoters convince taxpayers to claim false fuel tax credits. However, only some people are eligible for this category. According to the IRS, the fuel tax credit is available only to off-highway businesses, farms, agriculture, boats, and buses.
Scammers often charge high fees and file erroneously fraudulent refunds in the taxpayer’s name. The IRS is taking strict action against these false claims, so check the eligibility criteria on the irs.gov website to ensure you are not falling into any bogus scheme.
5. Bogus Charity Requests
In times like natural disasters or global emergencies like the pandemic-2020, bogus charities are at their peak. Scammers set up false organizations that claim to help citizens in difficult times, seeking money and personal information.
They try to convince you you’re doing it for a more significant cause. They often entice you by telling you you may get a tax benefit in return, like claiming a deduction on your federal tax return. However, the claim is only valid if the donation is made to a qualified charity.
An excellent way to ensure this is to ask these organizations for their employer identification number (EIN) because fake charities won’t have one. You can also check the charity’s authenticity by using IRS Tax Exempt Organization Search Tool.
6. “Ghost” Tax Return Preparers
Be looking for ghost tax preparers, as they are shady and often come with warning signs. The IRS highlights some major red flags to spot these scammers.
If your tax preparer charges a fee based on your tax refund, doesn’t sign the tax return, or omits writing their Preparer Tax Identification Number (PTIN), they are scamming you. Moreover, fraudsters also may ask you to sign a blank or incomplete tax return, promise large fraudulent claims or ask for cash payment without providing a receipt. These are the telltale signs that you’re in the hands of a thief.
7. Social Media Form Scams
In this scam, incorrect or misleading tax information is circulating on social media that urges taxpayers to participate in this scam in hopes of big refunds.
There are two ways through which it’s happening, form W-2 fraud and form 8944 fraud. In form W-2 fraud, scammers encourage taxpayers to use tax software to fill out false information in hopes of a refund.
On the other hand, in form 8944 fraud, scam artists entice people by saying they can claim false refunds even if they have a balance due. However, that is not the case, as the form is to be used by tax professionals only. The IRS has seen a significant increase in inaccurate information and alerts taxpayers that can get into serious trouble.
8. Spearphishing
Simply put, spearphishing is the extension of phishing, which is contacting taxpayers via email for personal information. In spearphishing, the target is organizations or businesses, usually tax preparers, as they have all the information regarding their clients.
Usually, scammers attack tax professionals by sending them links, malicious attachments, or other requests and may pose as clients. Some con artists may even use an IRS logo and attack tax preparers with subject lines such as “Action Required: Your account has now been put on hold.”
The IRS tells tax preparers to be cautious when opening emails because if they don’t, they can ultimately access sensitive client information, tax software preparation credentials, and the tax preparer’s identity. Fraudsters can then use this data to file fraudulent refunds.
9. Offer in Compromise
The offer in compromise (OIC) is only available to help people in no position to pay their tax debts. It’s a compromise where the taxpayer settles the tax debt with the IRS, which is less than the original amount owed.
However, only some taxpayers are eligible for this, and the IRS carefully considers all the facts, figures, and financial circumstances before approving this.
Many scammers claim they can get you an OIC for a small fee, thus successfully luring you into their malicious schemes. Most people need to meet the qualifications, and scammers file fraudulent claims on the taxpayer’s behalf, possibly costing them thousands of dollars.
To ensure your eligibility, IRC encourages you to use their free Offer in Compromise Pre-Qualifier Tool, which will help you know about your eligibility. Moreover, it is strongly advised to refrain from taking help from any third parties and file for OIC independently.
10. Schemes For High-Income Earners
Scammers know quite a few ways to trick high-income earners into paying fewer taxes but in a dishonest way. The IRS mentioned two ways fraudsters could lure taxpayers. Here are two ways scam artists entice high earners to file for false claims:
- Charitable Remainder Annuity Trust (CRAT): The taxpayer transfers the property to CRAT but pretends that they have sold it to the trust for its current value, which is different. The trust then sells the property without recognizing gain and buys a single premium immediate annuity (SPIA).
The beneficiary (taxpayer) receives a certain amount for the life or a specified period, depending on the trust rules. The scammer urges the taxpayer to play smart, reports a small amount of SPI as taxable income, and treats the remaining payment as non-taxable, all for a standard fee in return. - Monetized Installment Sales: In this, promoters target the taxpayers by selling something in return for a fee. They attract sellers by urging them to misuse the installment sale rule. A simple selling transaction is a seller selling the property to the buyer for cash and mentioning it while filing.
However, in this case, there is a twist; a seller makes a deal with the buyer for cash but involves a third-party (intermediary buyer) to whom he sells the property in exchange for an installment note equivalent to the cash price. The seller uses the installment note and schedule for his tax purposes and avoids paying the immediate liability he owes to the government.
11. False Avoidance Scams
Another common way scammers persuade taxpayers is by luring them into false avoidance scams.
- Micro-Captive Insurance Arrangements: A micro-captive is an insurance company where owners choose to file taxes only on the investment income. These companies often don’t meet many attributes of the insurance business and have numerous risks.
- Syndicated Conservation Easement Transactions (SCET): Fraudsters contact people who own land to sell ownership interests (shares) to investors through partnerships in return for a generous fee. The emphasis is then placed on connecting with the qualified charitable organization for the SCET special agreement. In doing this, a treaty is signed to preserve the land for its value. Here are the tricks scammers use to fraud the tax system. They often excite the price of undeveloped land and grossly misreport the inflated price on which the claim will be made. Doing this puts you in a red zone with IRS.
12. International Scams
Some promoters assure taxpayers there will be no taxes if they invest their money internationally. However, that is not true because U.S. citizens are taxed on worldwide income, and there is no way to avoid taxation.
- Offshore Accounts and Digital Assets: Individuals invest in offshore accounts like cryptocurrency, nominee entities, and brokerage accounts, thinking that IRS won’t be able to track them down.
- Maltese Individual Retirement Arrangements Misusing Treaty: Many taxpayers fall into the trap set by promoters to invest in foreign individual retirement arrangements in Malta (or other foreign countries), thinking they would be exempted from paying tax on this amount as a “pension fund” under a tax treaty. Sadly, that is not true, and the scam happens due to taxpayer-limited connections to local laws of foreign countries.
Don’t Fall For Scams or Mess Up Your Taxes!
Unfortunately, tax scams can really hurt your finances both personally and professionally. If you don’t already have a quality bookkeeper in place to help you navigate tax laws and provide guidance on potential scams, then it’s time to get your affairs in order.
Luckily, Remote Quality Bookkeeping is here to help. We provide cost-effective, efficient, and accurate accounting services for small businesses and franchisees throughout the United States, and we’d love to help you, too. Visit our website to start your free trial today so you can learn how valuable it can be to have certified remote bookkeepers on your side.
References
[1] https://www.irs.gov/newsroom/irs-wraps-up-2023-dirty-dozen-list-reminds-taxpayers-and-tax-pros-to-be-wary-of-scams-and-schemes-even-after-tax-season
[2] https://www.irs.gov/pub/irs-pdf/p3583.pdf
[3] https://www.irs.gov/coronavirus/employee-retention-credit
