2023 IRS Dirty Dozen: List of Tax Shelters Identified by IRS

Every year, the Internal Revenue Service (IRS) releases its “Dirty Dozen” list, which comprises the most common tax scams and schemes used by taxpayers to evade taxes. This year is no different, and the IRS has identified twelve tax shelters that it will actively pursue in both criminal and civil audits. 

As taxpayers, it is crucial to be aware of these schemes and ensure that we comply with the tax laws and regulations to avoid falling into the IRS’s trap. Let’s dive into the 2023 IRS Dirty Dozen and understand how we can steer clear of these tax shelters.

1. ERC – Employee Retention Credit

The Employee Retention Credit (ERC) is a refundable tax credit that provides financial relief to eligible businesses during the pandemic. Specifically, it offers up to $5,000 per employee in 2020 and up to $28,000 per employee in 2021 as a refundable tax credit. This means that eligible businesses can claim this credit on their tax return and receive a refund even if they do not owe any taxes. 

IRS Commissioner Daniel Werfel called the aggressive marketing of the credits “deeply troubling” and “a major concern for the IRS.” Why? The issue lies in the fact that some promoters do not inform taxpayers that they cannot claim the ERC on wages that were already reported as payroll costs in claiming PPP forgiveness. 

Despite the concerns raised about aggressive marketing tactics and confusion regarding its eligibility criteria, the ERC remains a valuable resource for businesses that continued to pay their employees during the pandemic or experienced a significant decline in gross receipts.

Requirements:

To qualify for the Employee Retention Credit (ERC), eligible employers must meet one of the following requirements:

1. The employer must have experienced a full or partial suspension of operations due to COVID-19, as a result of a government order limiting commerce, travel, or group meetings; OR

2. The employer must have experienced a significant decline in gross receipts during 2020 or during the first three quarters of 2021 compared to the same period in 2019 (roughly more than a 20% reduction); OR

3. The employer must qualify as a recovery startup business (RSB) in Q3 or Q4 of 2021. An RSB is a business that began operating after February 15, 2020, and has an annual gross revenue of less than $1,000,000.

Issues:

• Anytime the government is giving out a “refundable credit” that provides a refund beyond the taxes owed for a given year, there is an incentive for fraud.
• According to the Government Accountability Office (GAO), 367,280 ERC filings by employers have claimed $32 billion in credits.
• The IRS subsequently identified 11,096 suspicious returns indicating potential identity theft for more than $2 trillion in credits claimed.
• Improperly calculated ERC (claiming more than your business is entitled to) can result in failure to deposit penalties and interest on the payroll return and penalties up to 75% of the underpayment (if fraud is found).
• The ERC provides a refund of a percentage of the eligible employer’s share of Social Security Tax.
• Some companies were not actually operating or in business, leading to mass fraud.
• The complexity of the ERC rules and calculations made it difficult for typical business owners to understand and review their return.
• To correct ERC errors, businesses can file an amended payroll return to remove the ERC or correct it and return any funds received.
• Congress amended the statute of limitations from three to five years to audit businesses on the ERC issue.
• The total amount refunded in ERC funds by the government is unclear and may be subject to budget ceilings or the availability of additional funds.
• The number of businesses that potentially qualify for the ERC is also unknown and may depend on eligibility criteria and available funding.

2. Phishing and Smishing Schemes

Cybercriminals have been actively using phishing and smishing schemes to scam individuals and businesses out of their personal and financial information. In these schemes, the criminals impersonate IRS agents and use emails or text messages to deceive their victims. 

Phishing scams may include emails that offer a fake refund or notify the recipient that they are under investigation for tax fraud. Smishing scams may come in the form of text messages that claim the recipient’s account has been put on hold. It is important to remember that the IRS does not initiate contact through email, text messages, or social media, and any unsolicited messages of this nature should be treated as suspicious and potentially harmful.

3. The Online Account Scam

The online account scam is a prevalent fraud scheme that criminals use to steal personal information and commit identity theft. Scammers pose as third-party agents who offer to help taxpayers set up an online account with IRS. Once they have access to your account information, they can file a fraudulent tax return in your name and collect the refund. This scam can have serious consequences, including damage to your credit score and reputation. It is important to remember that the IRS offers free online account services, and you should never provide personal information to any third party claiming to help you with the process.

4. Frivolous Fuel Tax Credit Promotion

The frivolous fuel tax credit promotion is a scam that targets unsuspecting taxpayers. Although the federal government taxes gasoline, diesel fuel, kerosene, alternative fuels, and other types of fuel, there are certain commercial uses of these fuels that are nontaxable. However, this tax credit is not available to most taxpayers. 

Despite this, some tax preparers and promoters continue to pitch this credit to individuals in an attempt to defraud them. It is essential to be aware of this scheme and to seek advice from a reputable tax professional if you have any questions about your eligibility for tax credits or deductions. Falling victim to frivolous fuel tax credit promotion can lead to costly fines, penalties, and legal problems.

5. Fake Charities

Fake charities are a common scheme used by scammers to take advantage of people’s generosity after natural disasters or other tragedies. These scammers create fraudulent non-profit organizations and solicit donations from unsuspecting individuals. It is important to verify the legitimacy of a charity before making a donation. 

IRS has a tax exempt organization tool that can be used to check if an organization has a valid 501(c)(3) status, which is necessary for your donation to qualify for a tax deduction.

6. Shady Tax Preparers

It is important to be cautious of shady tax preparers who may take advantage of their clients. A red flag is if the preparer’s fee is calculated based on the size of your refund. A legitimate tax preparer’s role is to produce an accurate tax return and help legitimately reduce your taxes. Do not trust preparers who make unrealistic promises or guarantees of larger refunds. 

Make sure to ask for their Preparer Tax Identification Number (PTIN) and check their credentials through the IRS directory. Additionally, make sure to review your tax return carefully before filing to ensure that all information is accurate and all deductions and credits are legitimate. 

By taking these precautions, you can avoid becoming a victim of fraudulent tax preparers and ensure that your taxes are filed accurately and legitimately.

7. Trending Tax Advice on Social Media

The internet is full of tax advice, but not all of it is good. One scheme making the rounds on social media encourages people to manually falsify information on their W-2 form to inflate withholdings and receive a larger refund.

However, this is illegal and can result in serious consequences if caught. It’s important to get tax advice from a reputable CPA or tax preparer to avoid any fraudulent activity.

8. Spear-Phishing emails

Spear-phishing emails are another tactic used by scammers to steal financial information. They target tax preparers who have a lot of financial information for each of their clients. These emails may appear to come from a legitimate source and ask for sensitive information such as login credentials. 

It’s important for tax preparers to stay vigilant and confirm the legitimacy of any emails before providing any sensitive information. It’s also important for taxpayers to only provide their personal information to trusted and reputable tax preparers.

9. OIC Mills

It is common to come across companies promoting the resolution of tax debt with the IRS, especially if you owe more than $10,000. They often advertise an Offer in Compromise (OIC) as a solution.

 However, it’s important to note that OICs can be difficult to get accepted by the IRS, and they are not a one-size-fits-all solution. To qualify for an OIC, there must be doubt as to collectibility or doubt as to liability, and it requires a lot of financial records and analysis by an expert, such as a tax attorney. In 2021, approximately 50,000 offers were submitted, but only 15,000 were accepted by the IRS, which is a success rate of around 30%. It’s important to be cautious when considering an OIC and seek advice from a reputable tax professional to determine if it’s a viable solution for your specific tax situation.

10. Schemes Targeting High Income Filers

The Justice Department has shut down a multistate operation promoting the fraudulent use of charitable remainder annuity trusts. While there are legitimate tax deductions and transactions to reduce tax, they need to be vetted out by a qualified tax professional and attorney. It is important to be aware of the various schemes out there and to seek advice from reputable professionals.

11. Bogus Tax Avoidance Strategies

Promoters show a tax strategy to game the system, such as syndicated conservation easements, with inflated property values. These strategies are often aimed at high income filers looking for ways to reduce their tax burden. However, they can result in significant penalties and legal issues. It is essential to consult with a qualified tax professional before engaging in any tax avoidance strategies.

12. Offshore Accounts & Digital Assets

The IRS requires individuals to report any offshore accounts and digital assets they hold on their tax returns. This includes creating a foreign bank account or holding digital currency, both of which must be reported as “property” on the new 2022 tax return. It’s important to ensure you properly report all of your assets, as the IRS is actively pursuing those who attempt to hide assets and evade taxes. If you’re unsure about how to properly report your offshore accounts or digital assets, it’s best to consult with a qualified tax professional who can guide you through the process and help you avoid any potential legal issues.

Any Questions?

In conclusion, there are many tax schemes out there that are designed to deceive and defraud taxpayers. It is crucial to stay vigilant and protect yourself against these schemes by doing your research and seeking advice from reputable tax professionals. Remember, if a tax scheme seems too good to be true, it probably is. 

At Milikowsky Tax Law, we are committed to helping taxpayers navigate the complexities of the tax system and avoid falling victim to tax scams. Our team of experienced tax professionals can help you stay compliant with tax laws, while maximizing your savings and minimizing your tax liability. If you have any questions or concerns about tax scams, or need help with your tax planning and preparation, please don’t hesitate to contact us.