Tim’s Tax News on the Tenth – July 2021
IRS Announces Its Dirty Dozen Tax Scams for 2021
The IRS on June 28, 2021 began to unveil its "Dirty Dozen" list for 2021 with a warning for taxpayers, tax professionals, and financial institutions to be on the lookout for these 12 nefarious schemes and scams. This year's "Dirty Dozen" the IRS has separated into four categories:
- Pandemic-related scams like Economic Impact Payment theft;
- Personal information cons including phishing, ransomware and phone "phishing;"
- Ruses focusing on unsuspecting victims like fake charities and senior/immigrant fraud; and
- Schemes that persuade taxpayers into unscrupulous actions such as Offer In Compromise mills and syndicated conservation easements.
The specific tax scams that the IRS wants taxpayers to be on guard against are as follows:
Economic Impact Payment theft. A continuing threat to individuals is from identity thieves who try to steal Economic Impact Payments, also known as stimulus payments. Most eligible people will get their payments automatically from the IRS. Taxpayers should watch out for these tell-tale signs of a scam:
- Any text messages, random incoming phone calls, or emails inquiring about bank account information or requesting recipients to click a link or verify data should be considered suspicious and deleted without opening.
- Be alert to mailbox theft. Frequently check mail and report suspected mail losses to Postal Inspectors.
- Do not fall for stimulus check scams. The IRS will not initiate contact by phone, email, text, or social media asking for Social Security numbers or other personal or financial information related to Economic Impact Payments.
Unemployment fraud leading to inaccurate taxpayer 1099-Gs. Because of the COVID-19 pandemic, many taxpayers lost their jobs and received unemployment compensation from their state. However, scammers also took advantage of the pandemic by filing fraudulent claims for unemployment compensation using stolen personal information of individuals who had not filed claims. Payments made on these fraudulent claims went to the identity thieves.
The IRS reminds taxpayers to be on the lookout for receiving a Form 1099-G reporting unemployment compensation that they did not receive. For people in this situation, the IRS urges them to contact their appropriate state agency for a corrected form. If a corrected form cannot be obtained so that a taxpayer can file a timely tax return, taxpayers should complete their return claiming only the unemployment compensation and other income they actually received.
Fake charities. The IRS advises taxpayers to be on the lookout for scammers who set up fake organizations to take advantage of the public's generosity. They especially take advantage of tragedies and disasters, such as the COVID-19 pandemic.
Scams requesting donations for disaster relief efforts are especially common on the phone. Taxpayers should always check out a charity before they donate, and they should not feel pressured to give immediately.
Taxpayers who give money or goods to a charity may be able to claim a deduction on their federal tax return by reducing the amount of their taxable income. But taxpayers should remember that to receive a deduction, taxpayers must donate to a qualified charity. To check the status of a charity, use the IRS Tax Exempt Organization Search tool.
Immigrant/senior fraud. IRS impersonators and other scammers are known to target groups with limited English proficiency as well as senior citizens. These scams are often threatening in nature.
While it has diminished recently, the IRS impersonation scam remains a common scam. This is where a taxpayer receives a telephone call threatening jail time, deportation, or revocation of a driver's license from someone claiming to be with the IRS. Taxpayers who are recent immigrants often are the most vulnerable and should ignore these threats and not engage the scammers.
The IRS reminds taxpayers that the first contact with the IRS will usually be through mail, not over the phone. Legitimate IRS employees will not threaten to revoke licenses or have a person deported. These are scare tactics.
Seniors Beware
Senior citizens and those who care about them need to be on alert for tax scams targeting older Americans. The IRS recognizes the pervasiveness of fraud targeting older Americans, along with the Department of Justice and FBI, the Federal Trade Commission, and the Consumer Financial Protection Bureau (CFPB), among others.
In an effort to make filing taxes easier for seniors, the IRS reminds seniors born before Jan. 2, 1956, that the IRS has re-designed the Form 1040 and its instructions, and that they can use the Form 1040SR and related instructions.
Offer in Compromise "mills." Offer in Compromise mills contort the IRS program into something it is not – misleading people with no chance of meeting the requirements while charging excessive fees, often thousands of dollars.
"We're increasingly concerned that people having trouble paying their taxes are being duped into misleading claims about settling their tax debts for 'pennies on the dollar'," said IRS Commissioner Chuck Rettig. "The IRS urges people to take a few minutes to review information on IRS.gov to see if they might be a good candidate for the program – and avoiding costly promoters who advertise on radio and television."
The IRS reminds taxpayers to beware of promoters claiming their services are needed to settle with the IRS, that their tax debts can be settled for "pennies on the dollar" or that there is a limited window of time to resolve tax debts through the Offer in Compromise (OIC) program.
An "offer," or OIC, is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax debt. The IRS has the authority to settle, or "compromise," federal tax liabilities by accepting less than full payment under certain circumstances. However, some promoters are inappropriately advising indebted taxpayers to file an OIC application with the IRS, even though the promoters know the person will not qualify. This costs honest taxpayers money and time.
Taxpayers should be especially wary of promoters who claim they can obtain larger offer settlements than others or who make misleading promises that the IRS will accept an offer for a small percentage. Companies advertising on TV or radio frequently cannot do anything for taxpayers that our office cannot do for the taxpayer.
Unscrupulous tax return preparers. Although most tax preparers are ethical and trustworthy, taxpayers should be wary of preparers who will not sign the tax returns they prepare, often referred to as ghost preparers. For e-filed returns, the "ghost" will prepare the return, but refuse to digitally sign as the paid preparer.
Unscrupulous tax return preparers may:
- Require payment in cash only and will not provide a receipt.
- Invent income to qualify their clients for tax credits.
- Claim fake deductions to boost the size of the refund.
- Direct refunds into their bank account, not the taxpayer's account.
It's important for taxpayers to choose their tax return preparer wisely. Taxpayers should also remember that they are legally responsible for what is on their tax return even if it is prepared by someone else. Consumers can help protect themselves by choosing a reputable tax preparer.
Unemployment insurance fraud. Unemployment fraud often involves individuals acting in coordination with or against employers and financial institutions to get state and local assistance to which they are not entitled. These scams can pose problems that can adversely affect taxpayers in the long run.
States, employers, and financial institutions need to be aware of the following scams related to unemployment insurance:
- Identity-related fraud: Filers submit applications for unemployment payments using stolen or fake identification information to perpetrate an account takeover.
- Employer-employee collusion fraud: The employee receives unemployment insurance payments while the employer continues to pay the employee reduced, unreported wages.
- Misrepresentation of income fraud: An individual returns to work and fails to report the income to continue receiving unemployment insurance payments, or in an effort to receive higher unemployment payments, applicants claim higher wages than they actually earned.
- Fictitious employer-employee fraud: Filers falsely claim they work for a legitimate company, or create a fictitious company, and supply fictitious employee and wage records to apply for unemployment insurance payments.
- Insider fraud: State employees use credentials to inappropriately access or change unemployment claims, resulting in the approval of unqualified applications, improper payment amounts, or movement of unemployment funds to accounts that are not on the application.
Below is a short list of financial red flag indicators of unemployment fraud:
- Unemployment payments are coming from a state other than the state in which the customer reportedly resides or has previously worked.
- Multiple state unemployment payments are made within the same disbursement timeframe.
- Unemployment payments are made in the name of a person other than the account holder or in the names of multiple unemployment payment recipients.
- Numerous deposits or electronic funds transfers (EFTs) are made that indicate they are unemployment payments from one or more states to people other than the account holder(s).
- A higher amount of unemployment payments is seen in the same timeframe compared to similar customers and the amount they received.
Tax-related phishing scams. The IRS warns taxpayers, businesses, and tax professionals to be alert for a continuing surge of fake emails, text messages, websites, and social media attempts to steal personal information. These attacks tend to increase during tax season and remain a major cause of identity theft throughout the year.
Phishing scams target individuals with communications appearing to come from legitimate sources to collect victims' personal and financial data and potentially infect their devices by convincing the target to download malicious programs. Cybercriminals usually send these phishing communications by email but may also use text messages or social media posts or messaging.
These phishing schemes can be tricky and cleverly disguised to look like they are from the IRS or from others in the tax community. Taxpayers are reminded to continually watch out for emails and other scams posing as the IRS, like those promising a big refund, missing stimulus payment, or even issuing a threat. People should not open attachments or click on links in those emails or text messages.
Phishing scams targeting tax professionals
As part of the Security Summit effort, the IRS warns tax professionals about phishing scams involving verification of Electronic Filing Identification Numbers (EFIN) and Centralized Authorization File (CAF) numbers. The agency has seen an increase in these kinds of scams, along with offers to buy and sell EFINs and CAFs.
Tax professionals have reported receiving scam e-mails from the fictitious "IRS Tax E-Filing" and the IRS reminds tax professionals who receive those e-mails to not open any attachments or click any links. Rather, they should report the scam to the Treasury Inspector General for Tax Administration.
The IRS reminds tax professionals to protect themselves against the unauthorized use of an EFIN. Tax professionals must not transfer their EFIN or ETIN by sale, merger, loan, gift, or otherwise to another entity.
Phishing – new client scams target tax pros
The "New Client" scam continues to be a prevalent form of phishing for tax pros. Here's an example in the form of an email: "I just moved here from Michigan. I have an urgent tax issue and I was hoping you could help," the email begins. "I hope you are taking on new clients."
The email says one attachment is an IRS notice and the other attachment is the prospective client's prior-year tax return. This scam has many variations so tax professionals should be wary and avoid opening attachments or clicking links when they don't know the e-mail sender.
Knowing what to watch for can help. Below is an actual example of another recent new client scam e-mail:
Impersonator phone calls/vishing. Individuals should be wary of unexpected phone calls asking for personal financial information. The IRS has seen an increase in voice-related phishing, or 'vishing,' particularly from scams related to federal tax liens. For those receiving phone calls out of the blue, security experts recommend asking questions of the caller but not providing any personal information. If in doubt, hang up immediately.
During 2020, almost 400 vishing scams were reported, a 14% increase from the prior year. Of those vishing scams, 25% were scammers who tried to use fake tax lien information. The number of tax-lien-related scams increased from 58 in 2019 to 104 in 2020, an increase of 79%. The IRS urges taxpayers to refrain from engaging potential scammers on the phone or online.
While both the IRS and the Federal Trade Commission have seen a decline in the number of reports of scammers claiming to be from the IRS telephoning potential victims, the agency urges taxpayers to be wary. (The IRS has seen a 43% decrease in the number of reports of calls from callers claiming to be from the IRS: 20,500 in 2020 compared to 36,000 in 2019. The FTC saw a 67% decline from 7,694 reports in 2019 to 2,571 in 2020.)
While the numbers may be on the decline, the IRS urges taxpayers to remain vigilant and to remember the following things about the IRS:
- The IRS generally first contacts people by mail - not by phone - about unpaid taxes.
- The IRS may attempt to reach individuals by telephone but will not insist on payment using an iTunes card, gift card, prepaid debit card, money order, or wire transfer.
- The IRS will never request personal or financial information by e-mail, text, or social media.
Recipients of these calls should hang up before giving out any information. If anyone receives an unexpected call from the IRS that they believe to be a scam, they can report it to the Treasury Inspector General for Tax Administration (TIGTA).
Social media scams. Taxpayers should be aware of social media scams, which frequently use events like COVID-19 to try to trick people. Social media enables unscrupulous individuals to lurk on accounts and extract personal information to use against the victim. These cons may send emails impersonating the victim's family, friends, or co-workers.
Social media scams have also led to tax-related identity theft. The basic element of social media scams is convincing a potential victim that he or she is dealing with a person close to them that they trust via email, text, or social media messaging.
Using personal information, a scammer may email a potential victim and include a link to something of interest to the recipient, but which contains malware intended to commit more crimes. Scammers also infiltrate their victim's emails and cell phones to go after their friends and family with fake emails that appear to be real, and text messages soliciting, for example, small donations to fake charities that are appealing to the victims.
Individuals should know that any of their information that is publicly shared on social media platforms can be collected and used against them. One way to circumvent these scams is to review privacy settings and limit data that is publicly shared.
Ransomware on the rise. Financial institutions should be aware of trends and indicators of ransomware, which is a form of malicious software ("malware") designed to block access to a computer system or data. Access is often blocked by encrypting data or programs on information technology (IT) systems to extort ransom payments from victims in exchange for decrypting the information and restoring victims' access to their systems or data. In some cases, in addition to the attack, the perpetrators threaten to publish sensitive files belonging to the victims, which can be individuals or business entities.
The U.S. Treasury Financial Crimes Enforcement Network (FINCEN), has noted that ransomware attacks continue to rise across various sectors, particularly across governmental entities as well as financial, educational, and healthcare institutions. Ransomware attacks on small municipalities and healthcare organizations have increased, likely due to the victims' weaker cybersecurity controls, such as inadequate system backups and ineffective incident response capabilities.
Syndicated conservation easements. In syndicated conservation easements promoters take a provision of tax law for conservation easements and twist it through using inflated appraisals of undeveloped land and partnerships. These abusive arrangements are designed to game the system and generate inflated and unwarranted tax deductions, often by using inflated appraisals of undeveloped land and partnerships devoid of a legitimate business purpose. More information can be found at IRS increases enforcement action on Syndicated Conservation Easements.
Abusive micro-captive arrangements. In abusive "micro-captive" structures, promoters, accountants, or wealth planners persuade owners of closely-held entities to participate in schemes that lack many of the attributes of insurance. For example, coverages may "insure" implausible risks, fail to match genuine business needs, or duplicate the taxpayer's commercial coverages. But the "premiums" paid under these arrangements are often excessive and used to skirt tax law. Additional information can be found at IRS offers settlement for micro-captive insurance schemes; letters being mailed to groups under audit. Recently, the IRS has stepped up enforcement against a variation using potentially abusive offshore captive insurance companies domiciled in Puerto Rico and elsewhere.
Potentially abusive use of the US-Malta tax treaty. Some U.S. citizens and residents are relying on an interpretation of the U.S.-Malta Income Tax Treaty (Treaty) to take the position that they may contribute appreciated property tax-free to certain Maltese pension plans and that there are also no tax consequences when the plan sells the assets and distributes proceeds to the U.S. taxpayer. Ordinarily, gain would be recognized upon disposition of the plan's assets and distributions of the proceeds. The IRS is evaluating the issue to determine the validity of these arrangements and whether Treaty benefits should be available in such instances and may challenge the associated tax treatment.
Improper claims of business credits. Improper claims for the research and experimentation credit generally involve failures to participate in, or substantiate, qualified research activities and/or satisfy the requirements related to qualified research expenses. To claim a research credit, taxpayers must evaluate and appropriately document their research activities over a period of time to establish the amount of qualified research expenses paid for each qualified research activity. Taxpayers should carefully review reports or studies to ensure they accurately reflect the taxpayer's activities.
Improper monetized installment sales. Promoters find taxpayers seeking to defer the recognition of gain upon the sale of appreciated property and organize an abusive shelter through selling them monetized installment sales. These transactions occur when an intermediary purchases appreciated property from a seller in exchange for an installment note, which typically provides for payments of interest only, with principal being paid at the end of the term. In these arrangements, the seller gets the lion's share of the proceeds but improperly delays the gain recognition on the appreciated property until the final payment on the installment note, often slated for many years later.
If you would like more details, please do not hesitate to call our office. Our office has been successful in helping taxpayers with IRS and IDOR collection problems for over 29 years. If you have a tax or debt problem, please contact me at 847-705-9698 or thughes@lavellelaw.com and find out how we can help you.
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Lavelle Law, Ltd. is registered with the Illinois Department of Financial and Professional Regulation as an approved continuing education provider for CPE for CPAs and Enrolled Agents. If your organization is seeking CPE courses in the area of Business Law, Innocent Spouse Relief, IRS Collections, Tax Scams (including ID Theft), or other areas in tax law that can be taught at your office, please contact me at thughes@lavellelaw.com.
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