Tax season means it’s time for the Internal Revenue Service to publish its annual “Dirty Dozen” list of common income tax scams, schemes, and “strategies.” These cyber-crime and tax reduction/avoidance plans-for-sale appear throughout the year but peak during tax season.

Educating yourself and your clients about how fraudsters are stealing money, personal information, and private data can help prevent the spread of this type of abuse and the financial and emotional damage it can cause.

The 2024 list includes some new scams as well as some that have made the list in prior years. These range from bad advice regarding sketchy tax schemes to digital deceit.

To help you spot these scams – and avoid falling victim to them – Here’s a brief overview of this year’s Dirty Dozen:

1. Employee Retention Credit claims

Be wary of aggressive pitches from scammers who promote large refunds related to the Employee Retention Credit (ERC), which is a refundable tax credit for certain eligible businesses and tax-exempt organizations that were affected during the COVID-19 pandemic. Solicitations related to the ERC tend to exaggerate who qualifies for the credit, when eligibility is in fact quite limited.

2. Phishing and smishing

With these scams, fake messages from purportedly legitimate organizations in the tax and financial community (including the IRS and state taxing authorities) request personal and financial information that can lead to identity theft. Such scams are called phishing when initiated via email and smishing when initiated via text message.

3. Online account “help” from third-party scammers

Third parties offer to help create a taxpayer’s IRS online account at IRS.gov, then help themselves to the taxpayer’s personal information.

4. False Fuel Tax Credit claims

Meant for off-highway business and farming use, the Fuel Tax Credit is promoted by fraudsters to improperly inflate income tax refunds.

5. Offer-in-compromise mills

These scammers offer to negotiate “offers in compromise” (a real and important IRS program) for people who clearly don’t qualify – often requiring an “up-front” fee for the bogus service.

6. Fake charities

Taxpayers who give money or property to a charity may be able to claim a deduction on their income tax return if a) they itemize deductions and b) the gift is to a qualified tax-exempt organization.

7. Unscrupulous tax return preparers

Common warning signs of an unscrupulous tax return preparer include charging a fee based upon the size of the refund and the preparer’s unwillingness to sign the return or include his or her PTIN (IRS Preparer Tax Identification Number).

8. Social media: Fraudulent form filing and bad advice

Just because it’s on the internet does not make it true! Certain social media posts encourage the filing of false or inaccurate information to produce a refund.

9. Spearphishing and cybersecurity for tax professionals

“Spearphishing” is phishing that targets individuals within a specific organization. Tax professionals are warned to protect against such data breaches, which allow bad actors to file fraudulent tax returns. The IRS says there is a special focus on new client scams, in which fraudsters, under the guise of a new tax preparation client, access and collect the tax preparer’s email address, password, and other sensitive information. Bogus returns are then filed, and refunds generated are collected under the tax preparer’s ID.

10. Schemes aimed at high-income filers

Three of the most common schemes targeting big earners include improper art donation deductions, abuse of Charitable Remainder Trusts, and devices to defer the recognition of gain upon the sale of appreciated property through the use of monetized installment sales.

11. Unlawful tax avoidance strategies

Again, the IRS provides us with two of the most common examples of unlawful tax avoidance schemes: Micro-captive Insurance Arrangements and Syndicated Conservation Easements. Taxpayers must be alert and seek professional advice when encountering these ploys.

12. Schemes with international elements

Hiding money offshore was never an appropriate tax reduction strategy. In today’s digitally interconnected world, such schemes are even less likely to succeed and more likely to generate significant penalties. Give close scrutiny to ploys promoting offshore accounts, digital assets, Maltese individual retirement plans, and Puerto Rican and foreign captive insurance structures.

Technology has made our lives easier in many ways, but it also introduces new vulnerabilities and risks for taxpayers. The tax abuse landscape is ever-changing and requires year-round vigilance both by taxpayers and their trusted advisors. Both would do well to keep in mind two rules of thumb: One, it is unwise to provide personal and financial information by phone, email, or online. And two, if it sounds too good to be true, then it probably is!

 

The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a financial professional. Federal and state laws and regulations are complex and subject to change.  Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information.