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Protecting Your Clients and Yourself: IRS's Annual Dirty Dozen Scams, Part 1

Protecting Your Clients and Yourself: IRS's Annual Dirty Dozen Scams, Part 1

The Internal Revenue Service (IRS) recently launched its annual Dirty Dozen list, highlighting the most prevalent schemes aimed at stealing personal and financial data. To review this list of fraudulent activity, we will look at six of the twelve scams in detail. 

Phishing and Smishing 

Phishing and smishing scams are on the rise, with fraudsters employing increasingly sophisticated tactics to deceive unsuspecting individuals and businesses. These scams often involve emails or text messages impersonating legitimate organizations, such as the IRS or state tax agencies. The goal is to trick recipients into divulging sensitive information or downloading malware onto their devices. 

Recognizing the Signs 

Phishing emails typically lure victims with promises of tax refunds or threaten them with false legal consequences for tax fraud. Smishing messages, on the other hand, use alarming language to prompt recipients to click on malicious links or provide personal information. Common red flags include urgent requests for sensitive data and suspicious sender addresses or phone numbers. 

Protecting Yourself and Your Clients 

  1. To safeguard against these scams, it's essential to follow best practices: 
  2. Verify the Sender: Before responding to any unsolicited communication, verify the sender's identity using a trusted method, such as calling a known phone number or visiting an official website. 
  3. Exercise Caution: Never click on links or open attachments in suspicious emails or text messages. These could contain malware or ransomware designed to compromise your devices. 
  4. Report Suspicious Activity: If you receive a phishing or smishing attempt, report it to the IRS at phishing@irs.gov. Include the full email headers or forward the message as-is for investigation. 
  5. Educate Your Clients: Remind your clients to remain vigilant against scams and provide guidance on how to identify and report suspicious activity. 

In addition to protecting against phishing and smishing scams, tax preparers play a crucial role in combating abusive tax practices and fraudulent tax return preparation. The IRS encourages individuals to report any suspicious activity using Form 14242 or by contacting the Whistleblower Office. 

Protecting Against Fake Charity Scams During Times of Need 

In the midst of natural disasters and tragic events, it's common for individuals to extend a helping hand by donating to charitable organizations. However, amidst the genuine efforts to support those in need, there lurk scammers who exploit generosity for personal gain. These fraudulent entities not only siphon money from well-meaning contributors but also harvest sensitive personal and financial data, leaving victims vulnerable to tax-related identity theft. 

Identifying Fake Charities 

Fake charities have a significant impact on taxpayers, businesses, and the tax professional community. To distinguish between legitimate charities and their deceptive counterparts, consider the following guidelines: 

  1. Verify Legitimacy: Before making a donation, conduct thorough research to ensure that the charity is reputable and tax-exempt. Utilize the IRS's Tax-Exempt Organization Search (TEOS) tool to verify its status and legitimacy. 
  2. Exercise Caution: Beware of high-pressure tactics employed by scammers to solicit donations. Genuine charities appreciate contributions but do not coerce individuals into immediate payments. Encourage your clients to take their time and validate the charity's credentials before donating. 
  3. Secure Payment Methods: Advise donors to use secure payment methods such as credit cards or checks when making contributions. Avoid charities that request unconventional payment methods like gift cards or wire transfers, as these are often red flags for fraudulent activity. 
  4. Protect Personal Information: Remind clients to exercise caution when sharing personal or financial information with charities. Scammers may exploit such data for malicious purposes, leading to identity theft or financial fraud. 

By remaining vigilant and informed, tax preparers can help mitigate the risks associated with fake charities and protect their clients from falling victim to scams. For more information on identifying and reporting fraudulent activity, visit the IRS website and explore resources provided by trusted organizations like the Federal Trade Commission. 


Offer in Compromise Scams from Predatory Practices 

Amidst legitimate avenues for tax relief, there exist predatory practices that exploit vulnerable taxpayers. Offer in Compromise (OIC) mills aggressively mislead taxpayers with promises of resolving their tax debts at a fraction of the cost. 

Understanding Offer in Compromise Mills 

While the Offer in Compromise program is a legitimate option for taxpayers struggling with unpaid tax debts, OIC mills take advantage of misinformation and false promises to lure individuals into costly schemes. These companies often employ aggressive marketing tactics, promising to settle tax debts for pennies on the dollar. However, many taxpayers fail to meet the strict eligibility criteria for the program, resulting in wasted time and money on unnecessary fees. 

Protecting Taxpayers from Exploitation 

As tax professionals, it's our responsibility to empower our clients with accurate information and steer them away from fraudulent schemes. Here are some key points to consider: 

  1. Verify Eligibility: Encourage clients to use the IRS's Offer in Compromise Pre-Qualifier tool to determine their eligibility for the program. Emphasize that while OIC can provide relief for some taxpayers, it may not be suitable for everyone. 
  2. Avoid High Fees: Warn clients against OIC mills that charge exorbitant fees for services that can be obtained directly from the IRS for free. Remind them that seeking assistance from reputable tax professionals or contacting the IRS directly is a more prudent approach. 
  3. Report Fraudulent Activity: Encourage clients to report any individuals or companies promoting fraudulent tax schemes. They can use Form 14242 to report abusive tax promotions or preparers to the IRS Lead Development Center or the Whistleblower Office. 

By educating ourselves and our clients about the risks associated with OIC mills, we can help prevent taxpayers from falling victim to predatory practices. For more information on identifying and reporting fraudulent activity, visit IRS.gov and explore resources on abusive tax schemes and abusive tax return preparers. 

Improper Fuel Tax Credit Claims  

Tax preparers should be aware of unscrupulous promoters who exploit the Fuel Tax Credit, pushing improper claims and jeopardizing the financial well-being of unsuspecting taxpayers. 

Understanding the Fuel Tax Credit 

The Fuel Tax Credit is a legitimate tax benefit available to businesses and farmers for off-highway use of fuel. However, it is not applicable to most taxpayers. Despite this, the IRS has observed a surge in fictitious claims for the Fuel Tax Credit, often facilitated by promoters or return preparers who mislead taxpayers about their eligibility and fabricate documentation to support false claims. 

Protecting Taxpayers from Fraudulent Claims 

Here are some key points to consider when educating your clients about the risks associated with improper Fuel Tax Credit claims: 

  1. Exercise Caution: Warn clients against engaging with promoters who promise significant tax savings through improper Fuel Tax Credit claims. Remind them that falsely claiming this credit can result in severe consequences, including civil and criminal penalties. 
  2. Seek Professional Advice: Encourage clients to seek guidance from qualified tax professionals when navigating complex tax issues. By consulting with knowledgeable experts, taxpayers can ensure compliance with IRS regulations and avoid falling victim to fraudulent schemes. 
  3. Report Fraudulent Activity: Empower clients to report any individuals or companies promoting abusive tax practices or filing incorrect returns. They can use Form 14242 to report suspected abusive tax promotions or preparers to the IRS Lead Development Center or the Whistleblower Office. 

By staying vigilant and proactive, we can help protect our clients from falling victim to fraudulent Fuel Tax Credit claims. For more information on identifying and reporting fraudulent activity, visit IRS.gov and explore resources on abusive tax schemes and abusive tax return preparers. 

Protecting Businesses from Misleading Employee Retention Credit Claims 

Some unscrupulous promoters are aggressively pushing questionable claims for the Employee Retention Credit (ERC), putting businesses and other entities at risk of penalties, interest, and potential criminal prosecution. 

The Employee Retention Credit, also known as the ERC or ERTC, is a valuable tax credit designed to assist businesses that continued paying employees during the COVID-19 pandemic. However, some promoters are exploiting this program by misleading businesses into filing incorrect claims, often for financial gain. 

It's essential for tax preparers to educate clients about the risks associated with questionable ERC claims and empower them to make informed decisions. Here are some key steps to consider: 

  1. Review Eligibility Guidelines: Encourage clients to thoroughly review the ERC eligibility guidelines before submitting a claim. Remind them that eligibility depends on specific circumstances, and not all businesses qualify for the credit. 
  2. Consult a Tax Professional: Advise clients to consult with a trusted tax professional before filing an ERC claim. A tax professional can provide guidance tailored to their unique situation and help ensure compliance with IRS regulations. 
  3. Withdraw Unprocessed Claims: Inform clients that they have the option to withdraw any unprocessed ERC claims. This can help avoid future repayment, interest, and penalties associated with erroneous claims. 
  4. Stay Informed: Keep abreast of the latest IRS updates and resources related to the ERC. Familiarize yourself with common warning signs of incorrect ERC claims to better assist your clients. 

 The IRS has identified several warning signs that may indicate an ERC claim is incorrect. These include: 

  • Claiming the ERC for too many quarters 
  • Misrepresenting government orders that qualify for the credit 
  • Incorrect calculations or claiming the credit for ineligible wages 
  • Citing supply chain issues as a basis for eligibility 
  • Claiming the credit for an entire tax period when only a portion is eligible 
  • Falsely claiming wages or existence during the eligibility period 
  • Promoters urging businesses to claim the ERC with promises of no risk 

If you believe your client may have been misled into filing an incorrect ERC claim, the IRS offers resources and assistance to help rectify the situation. Encourage your clients to consult trusted tax professionals and utilize IRS materials such as the ERC Eligibility Checklist and Frequently Asked Questions. 

In conclusion, the unveiling of the Internal Revenue Service's (IRS) Dirty Dozen list serves as a crucial reminder of the ever-evolving landscape of cyber threats targeting personal and financial information. Through this examination of six of the twelve highlighted scams, vigilance and awareness are paramount in safeguarding oneself against fraudulent activities. By staying informed and adopting proactive measures, preparers can better help protect clients and their assets from falling victim to these pervasive schemes. 

Source: Dirty Dozen | Internal Revenue Service 

Drake Software Blog Team

The Drake Software Blog Team is proud to cover the latest in tax-industry-related news, from tax law and IRS updates to technology and business strategies. If you have questions about an article or just want to reach out to our staff, email comments@taxingsubjects.com.