Every year, the Internal Revenue Service (IRS) publishes what they consider to be the "Dirty Dozen" tax scams utilized by unscrupulous tax preparers every year. These are the scams that you should look out for when you are choosing your tax preparer for this year's tax returns. The IRS published each tax scam in a separate publication. I'm going to give your the consolidated version with a list and a brief synopsis of every tax scam. Here we go:
Employee Retention Tax Credits
Let's start with who is eligible to utilize the ERC. The qualifications to use the credit include:
Sustained a full or partial suspension of operations due to orders from an appropriate government authority, limiting commerce, travel or group meetings because of COVID-19 during 2020 or the first three quarters of 2021,
Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts for the first three quarters of 2021, or
Qualified as a recovery start-up business for the third or fourth quarters of 2021.
From the list of qualifications, the purpose of the credit was to provide some relief for businesses that were doing their best to keep employees on the payroll when business was limited due to the pandemic. It is a stimulation for the small business economy, not a method to lower your taxes because you didn't plan your business funds wisely.
Scammers using email or text messages to trick you
The IRS is not going to email you or text you. They send everything through the postal mail. In the millennial mind, this seems antiquated, however, it also prevents scammers from siphoning your personal information through spamming or phishing emails posing as the IRS. The state revenue department may email you to get in contact with you. If you suspect the email is a scam, go to the state department of revenue's website and call the number on the website; not the number provided in the email. If it is a legitimate attempt to get in contact with you, they will confirm so on the phone. The IRS will not communicate via text or email. You can only contact them via phone, fax, or secure portal. Don't let this happen to you or your business.
Scammers offering assistance to set-up an online account
You don't need assistance to open on online account with the IRS. Many times, scheduling out a few hours of your day to call the IRS or make an appointment with the local IRS office will give you the assistance that you need regarding your tax records. Your tax preparer does not need to set up an account for you. They use their online software to submit your tax returns. If you need a tax transcript, create an online account on your own, call to the IRS for assistance, or go into your local office for assistance.
False Fuel Tax Credit Claims
This fuel tax credit was created for off-highway business and farming businesses; not every day fuel use. So if you do not have a farm or an off-highway business, you can't claim this credit. If someone tries to get you to use this credit on your personal or business tax return, get your items and leave. Find another tax preparer or an accountant that knows how to apply tax credits.
Fake Charities
There is nothing wrong with a giving heart. It also helps that you can claim charitable contributions as a deduction on your personal income taxes. The harm is with individuals that take advantage of giving hearts. Here are some tips from the IRS to help you discern the valid tax-exempt organizations from those that are out to scam you out of your money and personal identifying information. The tips include:
Don't give into pressure.
Verify their tax exempt status before giving.
Be wary as to how a donation is requested.
Don't give any more than needed.
Shady Tax Preparers
The IRS warns of the fly by night tax preparers or the tax preparers that are out to scam you of your personal identifying information. Here are some of the things the IRS states may indicate that you are working with a shady tax preparer:
Ask for a cash only payment without providing a receipt.
Invent false income to try to get their clients more tax credits.
Claim fake deductions to boost the size of the refund.
Direct refunds into their bank account, not the taxpayer's account.
If you have read the above points and said that has happened to me, you can report the tax preparer here.
Social Media Experts
The indivduals that you are receiving tax information from should have some quaifications. Look for how many years they have been a tax preparer, where did they receive their training, are they a CPA or an attorney. The best experience for tax preparation may start with whether they served with VITA/TCE a few tax seasons or worked under a well-established tax preparation business, even then there are bad apples in the bunch.
Two of the most prevalent pieces of advice roaming social media is that you can file a Form 8944 to get a refund from the IRS if you owe a balance. Don't do it. The other is creating fake W-2s. If you are a business, you have to file your W-2s and W-3s online. The IRS won't allow you to print the form and mail it in anymore. If you are a small business that needs to file W-2s and W-3s, you can visit this site to submit them to the Social Security Administration and the Internal Revenue Service. Do not create a fake W-2 to obtain a higher tax refund. The TIN you use on the W-2 will be verified and you will be found out.
Spearfishing
This tax scam involves tax payers and tax professionals. Be wary of unknown emails. The IRS stated, "Through these spearphishing emails, scammers try to steal client data, tax software preparation credentials and tax preparer identities with the goal of getting fraudulent tax refunds. These requests can range from an email that looks like it's from a potential new client to a request targeting payroll and human resource departments asking for sensitive Form W-2 information." If you do not recognize the email, yet it seems official, your best course of action is to go to the official website and call the number to contact to verify the information.
Offers in Compromise Mills
You've seen the last night commercials. They assure you that they can make your tax debt go away or lower it significantly. That is not the situation for every tax payer. Sometimes, you really do owe that much money to the IRS and the best form of action is an approved payment plan. The IRS actually has an online tool that you can use to make the determination as to whether you can submit an offer-in-compromise for your tax debt that you can find here.
Charitable Remainder Annuity Trusts and Monetized Installment Sales
This tax scam is aimed at high-net worth tax payers. Promoters take advantage of these tax deferment opportunities by misapplying them or failing to file the proper paperwork for the taxpayer to properly utilize these methods. The promoter is not on the hook for the penalty, the taxpayer is responsible in amounts up to 20-40% of the underpayment of the tax owed, or a civil fraud penalty of 75% of the tax owed. Make sure that if you utilize these methods to defer tax, you are working with a reputable individual or company that knows what they are doing and are honest in their dealings.
Abusive Tax Avoidance Schemes
There is a difference between knowing the Code and abusing the code. If the credits and deductions apply to your tax situation, by all means, utilize them to lower your tax liability. That is why they were voted into legislation. What you should not do is abuse the system to get over paying what you really should be paying. The IRS stated, "These tax avoidance strategies often target high-income individuals seeking to reduce or eliminate their tax obligation. Sometimes taxpayers are conned into believing they can participate in these schemes. People should always look for advice from an independent, trusted tax professional, not a promoter focused on aggressively marketing and pushing questionable transactions."
If you looked at the length of this blog and said, "I'm not reading that!" Here is the video published by the IRS on the issue.