Each year, the Internal Revenue Service (IRS) publishes the "Dirty Dozen" tax scams. This is a helpful list that benefits taxpayers and tax professionals. While tax scams tend to peak during tax-filing season, it is important to understand them. Scammers could take advantage of taxpayers at any time during the year.

IRS Commissioner Danny Werfel noted, "Scammers are coming up with new ways all the time to try to steal information from taxpayers. People should be wary and avoid sharing sensitive personal data over the phone, email or social media to avoid getting caught up in these scams. And people should always remember to be wary if a tax deal sounds too good to be true."

The 2023 Dirty Dozen includes a variety of new and creative scams. Last week's newsletter covered the first six of the scam list. This week's newsletter covers the remaining half.

7. Social Media Fraud — Millions of Americans have social media accounts. Many individuals spend 30 minutes or more each day on social media and view it as a source for information. With the growth of social media, there has been an increase in inaccurate or misleading tax information. There are also a number of strategies for fraudsters to make contact with individuals through social media in an effort to obtain personal tax information. The fraudster promises a large refund and uses that strategy to gain access to personal information. Individuals should not trust tax advice on social media and instead obtain tax information from IRS.gov or another reputable source.

8. Tax Professionals and Spearphishing — Phishing is a term for emails that are designed to encourage the victim to click on a link and download malware. Spearphishing is a specific strategy directed toward tax preparers and tax professionals. The spearphisher is usually a fraudster who claims to be a potential client. The fraudster engages in a series of emails with the CPA or tax preparer. After a relationship has been established, the fraudster sends a PDF of tax forms to the tax professional. When the tax professional clicks on the PDF, it downloads malware that gives the fraudster access to the tax professional's network. With this access, the fraudster downloads information from many clients and files false returns. The stolen client data is a huge cyber-disaster for the tax professional.

9. Tax Compromise Mills — The IRS has a program for individuals who are behind on their taxes called Offer in Compromise. This is a program for individuals who have genuine financial need and enables them to settle their tax bills with a payment system or a reduced tax amount. The fraudsters create an "Offer in Compromise" mill. After encouraging a taxpayer to make contact, the fraudster builds a relationship and frequently charges a large upfront fee. The fraudster then absconds with the fee and does not provide the promised service. The IRS emphasizes that a taxpayer can use the Offer in Compromise Pre-Qualifier tool on IRS.gov at no cost to determine if he or she is eligible.

10. High Income Frauds — Individuals with higher incomes are vulnerable to specific frauds. A scheme involving Charitable Remainder Annuity Trusts (CRATs) has emerged, which falsely promises individuals the ability to sell appreciated assets without paying any taxes. The promoters claim that the transfer of the assets into a CRAT allows the person to claim a step up in basis and sell it without any tax recognition. However, this violates the basic CRAT rules and distributions from the trust are fully taxable. Scammers have used this strategy to trick victims into transferring their property to the CRAT and not report taxable income. Eventually, the CRAT victim is caught and must pay a large tax and penalties to the IRS. (Editor's Note: A proper use of a charitable remainder trust has many recognized tax benefits, especially for high-income taxpayers.)

11. Micro-Captive Insurance — A micro-captive is an insurance company set up for a private individual. However, many of the micro-captive plans are not qualified and therefore are not legitimate insurance. The failed micro-captive can lead to large fees, an IRS audit and payment of taxes and penalties.

12. Syndicated Conservation Easements — Many landowners properly use conservation easements on real property. The conservation easement is a perpetual limit on the use of the real property and qualifies for a charitable contribution deduction. However, there have been promoters who buy property, sell partnership interests in the property to investors and claim a highly inflated charitable deduction. At least 80 of these syndicated conservation easement cases are being litigated in Tax Court. Many investors have had to pay large taxes and penalties to the IRS. The Inflation Reduction Act also included a new provision that generally limits the charitable deduction for a syndicated partnership to 2.5 times the investment.

The IRS encourages individuals who suspect tax fraud to complete IRS Form 14242, Report Suspected Abusive Tax Promotions or Preparers. This can be sent to the Internal Revenue Service Lead Development Center, Stop MS5040, 24000 Avila Road, Laguna Niguel, CA 92677-3405.