2021 Dirty Dozen Tax Scams
Pandemic-Related Fraud Tops the List
Every year, the IRS releases an updated list of the worst and most pervasive tax scams. The Dirty Dozen is meant to help taxpayers be more aware of potential fraud risks – and to a lesser extent, remind certain taxpayers who are running afoul of the law to be on the lookout.
Usually, tax scams peak during tax season. Since COVID-19, the threat of fraudulent schemes is heightened, year-round activity. 2020’s Dirty Dozen list can be found here.
This year’s Dirty Dozen list is separated into four categories:
- COVID-19-related fraud schemes
- Personal information scams
- Fake charities and senior/immigrant fraud schemes
- Fraudulent tax promoter schemes
Economic Impact Payment Theft
By now, most taxpayers received their economic impact payments (EIPs) from COVID-19. If not, and the taxpayer was otherwise entitled to receive one, it could be a case of theft. Be wary of text messages, calls, or emails regarding EIPs and asking for bank account information.
EIP theft has been a real issue at a macro level: it’s estimated that $3.5 billion in payments were issued to deceased taxpayers and $1.8 million in EIPs were issued to dependents who weren’t eligible in the first place.
When unemployment spiked during the height of the pandemic, thieves took advantage of the increase in unemployment claims to file fraudulent ones on behalf of individuals who did not file themselves. If a taxpayer receives a Form 1099-G, Certain Government Payments, for unemployment income but did not personally claim unemployment, should contact the state unemployment agency.
Scam emails or websites are nothing new on the Dirty Dozen list, but they’re getting more sophisticated. Think twice before clicking on a link. When in doubt, call the sender personally to verify.
Voice-related phishing is on the rise for scams related to federal tax liens. Do not provide financial or personal information over the phone, especially if the person is insistent about it.
Social Media Scams
Some hackers will impersonate people on a taxpayer’s social media friend list and attempt to gain access to personal information. To help prevent this, limit the amount of public information on social media sites.
Ransomware is a type of malware that once installed is used to coerce the organization or individual into paying a ransom to regain control. It’s not new and ransomware attacks are becoming more effective. Governmental entities, financial institutions, healthcare, and educational institutions are the most at-risk sectors, but any business in any industry can be at risk.
Crises and natural disasters give rise to charity fraud: a seemingly legitimate organization requesting funds to help those in need. Actual charities should be able to provide their employer identification number and taxpayers can also look up charities on Charity Navigator to be sure.
Individuals with limited English proficiency and senior citizens must remain on high alert for scammers who want to take advantage of them. Thieves will threaten deportation, jail time, or loss of driving privileges, while demands for cash do still occur.
ESL taxpayers can select up to 20 different languages to receive IRS communications using the Request for Change in Language Preference. Senior citizens may be eligible to use a simpler tax form, the 1040-SR. These measures can help to prevent fraud by giving vulnerable communities access to the full range of IRS services.
An offer-in-compromise is when the IRS and a taxpayer settle tax debt for a lesser amount than what may be owed. This is common; what’s fraudulent is when an OIC comes from an entity or individual other than the IRS claiming to settle for “pennies on the dollar.” If a taxpayer owes money to the IRS, work with a CPA to resolve it or the IRS directly – not a middleman.
Ghost Tax Return Preparers
Some so-called tax preparers can get taxpayers into trouble. They are fake and often commit tax fraud while putting unknowing taxpayers at risk. Be on the lookout for red flags like refusing to e-sign a return, failing to supply a tax preparer ID number, demanding cash for services, adding ineligible credits or deductions, or directing the refund into an account other than the taxpayer’s.
Unemployment Insurance Fraud
This technically appears twice on the list, and it’s not an accident.
General unemployment fraud happens when thieves steal or use false identification to file fake unemployment claims. Sometimes, this happens from within a company; other times, a completely unrelated scam artist commits the crime. Be aware that receiving unemployment benefits when still working, otherwise ineligible, or based on fake information, is against the law.
Promoter schemes work in a few different ways. Essentially, an entity or individual promotes an idea that seems “too good to be true.” It probably is. Promoter schemes include syndicated conservation easements, abusive micro captive arrangements, potentially abusive us of the U.S.-Malta tax treaty, and improper claims of business credits or monetized installment sales.
Some of these arrangements can be perfectly legal and legitimate, but taxpayers must tread carefully to remain in compliance of all tax laws. Be wary of a promotion that promises to eliminate tax ores or skirt known laws.
Tips to Reduce Tax Fraud
There are a few easy ways that taxpayers can reduce their risk of becoming a victim of tax fraud or identity theft.
It’s been said before and bears repeating: use stronger passwords. Too often, people use the same password for multiple accounts and/or they use simple, easy-to-hack passwords.
Another option now available to all taxpayers is an identity protection (IP) PIN; previously, PINs were only available to taxpayers who were already fraud victims. Now, any taxpayer can request one and use it when filing their taxes to help prevent tax identity theft.
Filing taxes as early as possible in tax season is another option to reduce fraud. Though this might not be possible for some taxpayers who are waiting on other tax forms, like K-1s or 1099s, it’s worthwhile for several reasons to be well-prepared with all tax and financial information come January.
Also note that software or accounts that require multi-factor authentication (MFA) are the most secure. Even though it involves an extra step or two to log in, it’s often one of the easiest ways to prevent unauthorized account access.
Remember that any communications from the IRS will never include threats, an offer to pay in gift cards or straight up cash, or other forms of coercion. The IRS first communicates with taxpayers via letters, so even if an email seems legitimate, it’s probably not. When in doubt, call your Adams Brown representative.