Article

Common IRS Scams to Watch For

April 18, 2024
Internal Revenue Service Building Sign

Key Takeaways

  • Be vigilant of IRS and tax-related scams, especially during tax filing season.
  • Recognize and avoid schemes like the false "Native American Tribe Trust Fund Federal Tax Credit" and others.
  • Use IRS resources directly for tax matters and verify charity legitimacy to prevent falling victim to fraud.

IRS scams can exploit individuals and organizations by impersonating the Internal Revenue Service (IRS) or a fictitious entity. When victims fall for these schemes, they often provide sensitive personal information.

It is vital to be aware of and recognize these scams and their warning signs before serious financial and legal consequences occur.

Many of these scams peak during tax filing season as companies and individuals prepare their returns.

Native American Tribe Trust Fund Federal Tax Credit

In the "Native American Tribe Trust Fund Federal Tax Credit" scheme, a company says they’ve purchased a large sum of "tax credits" worth $100,000. The company says it’s willing to sell to qualified businesses for a significant discount.

The company then requests financial documents to perform due diligence for credit qualification. There is even a full purchase agreement and a promise to indemnify all investors in case the IRS does not accept any tax credits.

This is a scam, and these promoters have already reached out to clients in multiple states.

Top IRS Tax Scams

The IRS also annually releases its list of top tax scams to watch for. Here’s what you need to know.

Employee Retention Credit Claims

ERC scammers promise sizable refunds for those ineligible to claim the Employee Retention Credit. The scheme is often used to collect the taxpayer's personal information.

  • The IRS has released a new disclosure program for those who received ERC funds in error. Learn more.

Phishing and Smishing

Scammers often pose as legitimate organizations, like the IRS and state authorities. They send unsolicited texts (smishing) or emails (phishing) to entice you to disclose valuable personal and financial information, posing a risk of identity theft.

Remember: The IRS primarily communicates through regular mail and never initiates contact via email, text, or social media regarding bills or tax refunds.

Online Account Help from Third-Party Scammers

Scammers offer to help set up a taxpayer's IRS online account on IRS.gov. Contrary to their claims, no external help is necessary, as the online account offers tax information directly. Taxpayers are strongly advised to independently create their online accounts directly through IRS.gov to safeguard against potential scams.

False Fuel Tax Credit Claims

The Fuel Tax Credit is meant for off-highway business and farming use and is unavailable to most taxpayers. Dishonest tax preparers encourage individuals to falsely claim the credit, inflating their refunds. The IRS has observed a rise in the promotion of filing specific refundable credits, particularly using Form 4136, Credit for Federal Tax Paid on Fuels.

False Charities

Scammers often set up fake charities to steal information. While donating money or goods to a charity may be eligible for a deduction, these deductions are only applicable if the contributions are made to a qualified tax-exempt organization officially recognized by the IRS.

Tax Return Preparers

Always exercise caution when choosing your tax return preparer. One major red flag is an unwillingness to sign the return or include their IRS PTIN on the return as required by law. Taxpayers should never sign a blank or incomplete return. Another common warning sign is a fee structure based on the size of the refund.

Social Media Scams

Social media can circulate misleading tax information enticing people to submit false or inaccurate information in hopes of getting a larger refund. One of the most common is elimination of business taxes using an S-Corporation (underpayment of Self-employment taxes).

Other instances involve manipulating familiar tax documents like Form W-2 and less commonly known ones like Form 8944. Form 8944, though legitimate, is only intended for a specific limited group. This scheme emphasizes the importance for taxpayers to be cautious and skeptical when encountering an offer on social media that seems too good to be true.

Spearphishing and Cybersecurity

Spearphishing is a customized form of phishing targeting a specific organization or business, especially prevalent if that organization has experienced a data breach. In the event of a successful spearphishing attack, client data can be compromised and identities stolen, enabling the submission of fraudulent tax returns.

Offer in Compromise Mills

The Offers in Compromise program exists for individuals unable to pay their federal tax debts. However, "mills" aggressively advertise Offers in Compromise to individuals who do not qualify, resulting in significant financial losses.

Remember: Taxpayers can check their eligibility for free using the IRS’s Offer in Compromise Pre-Qualifier tool.

High-Income Filer Schemes

Charitable Remainder Annuity Trusts allow taxpayers to contribute assets to charity while receiving annual income for either their lifetime or a specified duration. Unfortunately, some promoters exploit these trusts to eliminate ordinary income and capital gain or property sales.

Another potential area of concern is Monetized Installment Sales, where promoters target taxpayers seeking to defer gain recognition when selling appreciated property. These transactions involve facilitating a purported monetized installment sale for the taxpayer in exchange for a fee.

Bogus Tax Avoidance Strategies

Micro-captive insurance arrangements involve owners of an insurance company choosing to be taxed solely on the captive's investment income. However, fraudulent micro-captives lack key attributes of legitimate insurance.

Another strategy involves syndicated conservation easements, which allow taxpayers to claim a charitable contribution deduction for the fair market value when transferred to a charity. In this type of scam, participants manipulate the tax system by inflating deductions.

Schemes with International Elements

The IRS examines attempts to conceal assets in offshore accounts and digital assets like cryptocurrency. Such assets are not beyond the IRS’s reach.

Maltese individual retirement arrangements are another focus. U.S. citizens or residents attempt to evade U.S. tax by contributing to foreign arrangements in Malta. By improperly categorizing these foreign arrangements as "pension funds" for U.S. tax treaty purposes, participants misconstrue treaty provisions to claim unwarranted exemptions from U.S. income tax.

The IRS also scrutinizes purported insurance arrangements involving U.S. business owners and Puerto Rican or other foreign corporations, where deductions from premiums lack the characteristics of legitimate insurance.

How to Prepare for IRS Scams

It’s important to stay informed about various scams throughout the year, especially during tax season. While the IRS provides resources to help identify and avoid these scams, the ultimate responsibility lies with the taxpayer. Always be mindful when sharing personal and financial information.

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About the Author(s)

Ben Peeler

Ben J. Peeler, J.D., CPA, LL.M.

Partner/IRS Tax Controversy Practice Leader
Ben joined the firm early in 2014 with many years of tax experience, both as an attorney and an accountant. He specializes in federal tax, controversy and procedure work, assisting with clients in the areas of income tax, estate and gift tax, property tax, sales and use tax, estate planning and many other tax matters. Ben's vast experience includes representing clients before the IRS, as well as representing the IRS before the U.S. Tax Court and during litigation before the federal district courts as a special assistant to the United States Attorney. Today, Ben leads the firm's IRS Practices & Procedures as a federal tax, controversy and procedure specialist and serves on Eide Bailly's National Tax Office team that is committed to helping clients resolve their tax issues.