The IRS has to update its Dirty Dozen list each year because tax scams are always changing. There are always bad actors eager to take advantage of taxpayers who are confused about new tax credits, for example. Reviewing the Dirty Dozen list of top tax scams annually is best practice for closely held businesses.
Some new scams can be hard to detect unless you know to look for them. In fact, the first item in 2023 Dirty Dozen list is a new addition, and it’s a scam that has been used to deceive many closely held businesses in the past few years.
1. Employee Retention Credit scams
There has been a great deal of confusion around the Employee Retention Credit, which fraudsters have exploited in order to take advantage of businesses that did not actually qualify for this credit. Employers had to meet strict criteria during 2020 and 2021 to be eligible for the ERC. Only businesses that had operations suspended by a government order, experienced a significant decline in gross receipts or qualified as a recovery startup business may claim a credit for wages paid during 2020 and 2021. Even for businesses that meet those criteria, calculating ERC credits can be complex. Any wages a business reported as part of obtaining forgiveness for a PPP loan may not be counted toward its ERC, as one example.
Because the ERC rules have been somewhat murky, unscrupulous third parties have been able to convince businesses to claim credits they are not entitled to claim. You may have seen ads on TV and online for services that offer to help businesses get the ERC, for a fee. In some cases, ineligible businesses that hire these advisors are duped into filing. They may pay IRS penalties for filing inaccurate returns.
Many accounting and tax professionals have been vocal about the trouble that ERC confusion has caused for their businesses and their clients. On July 27, a hearing was held before the Oversight subcommittee of the House Committee on Ways & Means. Tax practitioners testified about their frustrations around ERC fraud and the dishonest credit mills that have deceived their clients. These actions have put many CPAs in difficult positions, trying to protect their clients from falling prey to bad actors or helping clients recover after filing ineligible claims. There is no word on whether Congress will take any action to mitigate these concerns.
The Rest of the 2023 IRS Dirty Dozen:
2. Email and text scams claiming to be from the IRS. The IRS reminds taxpayers that official IRS correspondence is almost always sent via mail and that notices about bills and tax refunds are never sent using text or email. Never click on any links in emails that claim to be unsolicited information from the IRS.
3. IRS online account setup scams. This scam occurs when identity thieves offer to help individual taxpayers set up their IRS.gov accounts so they can steal personal information.
4. Third-party scams involving fuel tax credit claims. In a scam very similar to what has been happening with ERC fraud, the IRS has seen an increase in the number of taxpayers being encouraged by third parties to claim a fuel tax credit they’re not eligible to claim.
5. Fake charity scams. Fraudulent parties are especially likely to target individuals and businesses for donations to fake charities in the wake of disasters and emergencies. These scammers steal not only money but also sensitive information that may allow them to commit identity theft from their well-meaning donors. It is imperative for taxpayers to do their due diligence on new or unfamiliar charities before making donations.
6. Shady tax preparer scams. The IRS notes there are several common tax frauds involving unscrupulous tax preparers, who commonly target individuals rather than closely held businesses and other organizations. Any legitimate tax preparation professional should have an IRS PTIN, be committed to only using accurate information in a client’s return and be willing to sign the completed return.
7. Social media tax “advice” scams. It goes without saying that no taxpayer, including closely held business owners, should use social media as a source of information about tax filing. A number of scams are currently circulating, and new ones are bound to arise around tax season every year.
8. “Spearfishing” scams targeting tax pros. Spearfishing (a specific type of phishing that targets organizations and businesses) is currently a top concern for tax professionals. The IRS urges the tax community to be vigilant about email as scammers may be able to gain access to clients’ private data if a tax professional clicks a fraudulent link or attachment in an email sent from an unknown source.
9. Offer in Compromise mills targeting taxpayers with tax debts. An individual or business trying to resolve federal tax debt may qualify for an Offer in Compromise, allowing the debt to be settled for less than the owed amount. As has happened with the ERC, bad actors have taken advantage of the program by knowingly advising some ineligible taxpayers to apply.
10. Schemes aimed at high-income filers. The IRS warns high-income filers to be aware of two specific frauds that may be used by untrustworthy promoters. First, these promoters may encourage taxpayers to misuse Charitable Remainder Trusts to avoid appropriate taxes on property sales. Second, promoters may offer to facilitate monetized installment sales for high-income taxpayers who want to sell appreciated property without recognizing capital gains. These arrangements may run afoul of IRS rules and taxpayers should work closely with trusted advisors before entering them.
11. Abusive tax avoidance schemes. Abusive micro-capture insurance arrangements can occur when an entity forms an insurance company to self-insure its losses, while evading certain taxes. Syndicated conservation easement arrangements occur when taxpayers transfer conservation easements to charity, gifting the charity with land or other real property that’s protected from future development. These arrangements can be facilitated by promoters who falsely inflate tax deductions for the donors.
12. Scams involving international elements. The IRS specifically identified three core areas of concern. First, taxpayers attempting to hide assets in offshore accounts. Second, U.S. citizens contributing to pension funds in Malta and other countries to avoid taxes on their retirement savings. Third, closely held businesses entering insurance arrangements with Puerto Rican corporations (or other foreign corporations). In these scams, the business may not actually be covered by legitimate insurance but gets a tax break by claiming a deduction for its premiums. The IRS notes that it is strengthening its investigation and enforcement processes around these scams.
Contact ARB for Tax Guidance for Closely Held Businesses
ARB’s Individual Tax and Private Client teams provide a range of tax and advisory services for closely held businesses and their owners. Each of these businesses is unique, and therefore each one has unique tax needs and unique vulnerabilities. We encourage our clients to reach out to us right away if they receive any tax-related message or offer that seems off or too good to be true. No question or concern is too small to bring to us if it could potentially prevent you from being scammed or exposed to malware.
If you have questions right now about the IRS’s 2023 Dirty Dozen list, ERC fraud or any issue related to tax scams, please don’t hesitate to contact me today.
by Dan Doiron, CPA, CVA
Dan Doiron has been in public accounting since his college internship with ARB in 1986. He has been a Principal since 1996 and works extensively with all types of clients to solve their compliance and tax planning issues. Dan was the May 1987 State of Maine Gold Medalist for earning the highest scores on all four parts of the CPA Examination. He is the Practice Leader of both ARB’s Business Tax Services Team and ARB’s Private Client Advisory Services Team.