Every year, the IRS compiles a “Dirty Dozen” list of common scams that taxpayers may encounter. A new issue leads-off the 2023 list: widespread promotion of ineligible claims for the Employee Retention Credit (ERC).

ERC Scams: Too Good to Be True

The IRS says it put ERC scams at the top of this year’s list because of what it called “blatant attempts by promoters to con ineligible people to claim the credit” based on inaccurate information about who qualifies and how the credit is calculated.

The ERC is a refundable tax credit available to qualified businesses that continued paying employees despite shutting down or sustaining a significant drop in revenue during the COVID pandemic. The qualification requirements—including the cause of the shutdowns, eligibility periods, and other relevant rules—are complex and have been revised several times since they were introduced.

Unscrupulous promoters are taking advantage of the complexity and possible confusion by offering to handle companies’ ERC applications. They often aggressively pressure businesses to sign up for a promised windfall in exchange for a sizable upfront fee. More recently, other scammers have created websites that claim to let taxpayers check their eligibility online, but which, in fact, only collect taxpayers’ personally identifiable information for use in identity theft or for sale on the dark web.

Phishing, Smishing, and Identity Theft Schemes

Identity theft is the objective of several other scams on this year’s Dirty Dozen list. The agency warns taxpayers to watch out for phony emails (phishing) or text messages (smishing) that appear to be notices from legitimate federal or state tax authorities. Their real purpose is to trick victims into providing financial information that can lead to identity theft.

In addition to reminding taxpayers never to click links in an unsolicited email, the IRS points out that it initiates most contacts through regular mail and will never make its first contact regarding a tax issue using email, texts, or social media.

The 2023 Dirty Dozen list also warns against identity theft scammers who offer to help taxpayers create an online account at IRS.gov when, in reality, taxpayers seldom need help signing in to this IRS service.

Phony Credits, Refunds, and Charity Deductions

Illegitimate ERC claims are not the only spurious tax credit and refund schemes that fraudsters run. The IRS reports an increase in unscrupulous promoters urging taxpayers to file erroneous claims for federal fuel tax credits. These credits are meant for off-highway business and farming use only and generally are not applicable to many companies.

The Dirty Dozen list also warns taxpayers to watch out for bogus charities, which often arise after a crisis or natural disaster, seeking both money and personal information they can exploit.

Tax Avoidance Scams

The Internal Revenue Code offers various legitimate ways for high-income taxpayers to reduce their taxable income or shield some investment gains from taxes. Unfortunately, scammers often con taxpayers into misusing these provisions.

Examples on this year’s list include illegitimate uses of Charitable Remainder Trusts and monetized installment sales transactions. Both are legitimate tools for reducing taxable gains on the sale of appreciated property, but promoters often abuse them by seeking large fees or other illicit income.

The Dirty Dozen list identifies three scams involving international tax issues. These include hidden offshore bank and brokerage accounts, illicit offshore accounts holding digital assets such as cryptocurrency, and individual retirement arrangements in Malta and other host countries that promoters incorrectly claim are tax-exempt pension funds. The agency also warns businesses to beware of captive insurance arrangements involving certain Puerto Rican companies or other foreign businesses.

Bogus Consultants and Advisors

Scammers who pose as legitimate tax preparers always concern the IRS. This year’s Dirty Dozen list includes a special warning against tax preparers who charge fees based on the size of a promised refund or who refuse to sign client returns or include their IRS Preparer Tax Identification Number as required by law.

A similar scheme involves Offer in Compromise “mills,” which aggressively promote the Offer in Compromise debt relief program to taxpayers who clearly do not qualify. Finally, this year’s list warns of misleading tax information on social media, including schemes that encourage people to submit false information on Form W-2 or other IRS forms in hopes of getting a large refund.

See the List

The items in the IRS’s Dirty Dozen list (you can see the entire list here) illustrate the well-known and well-proven guidance that things are seldom what they seem. Savvy business owners and alert individuals know that if something seems too good to be true, it probably is.

When you’re offered a tax strategy that promises surprising results, let us know! We can help you determine if the offer is genuine.