It’s July – IRS Scams Continue

I received an email today that was reportedly from the IRS asking me to complete a form for them to verify my identify. IRS does have a 5071C letter that is used to verify your identity to process a federal income tax return filed with your name and taxpayer identification. When I Googled the 5071C I found a TurboTax reference – a knowledgeable resource. The 5071C letters are sent to you via US MAIL. They are never emailed…that email was a SCAM!

That got me wondering about what other scams are happening with taxes and/or the IRS.  I discovered the Internal Revenue Service has an annual Dirty Dozen scams they provide for public information. They are attempting to educate the public and hopefully prevent the scams from happening. Here is the link to the Dirty Dozen:

https://irs.gov/newsroom/dirty-dozen

I will share a few of the more interesting scams with you.

Phish or Smish: Don’t take the bait

Taxpayers and tax professionals should be alert to fake communications posing as legitimate organizations in the tax and financial community, including the IRS and state tax agencies. These messages arrive in the form of unsolicited texts or emails to lure unsuspecting victims to provide valuable personal and financial information that can lead to identity theft. There are two main types:

• Phishing: An email sent by fraudsters claiming to come from the IRS. The email lures the victims into the scam with a variety of ruses such as enticing victims with a phony tax refund or threatening them with false legal or criminal charges for tax fraud. (This is what I experienced.)

• Smishing: A text or smartphone SMS message where scammers often use alarming language such as, “Your account has now been put on hold,” or “Unusual Activity Report,” with a bogus “Solutions” link to restore the recipient’s account. Unexpected tax refunds are another potential lure for scam artists.

Never click on any unsolicited communication claiming to be the IRS as it may surreptitiously load malware. It may also be a way for malicious hackers to load ransomware that keeps the legitimate user from accessing their system and files. (1)

Getting Tax Advice on Social Media

Social media can routinely circulate inaccurate or misleading tax information, where people on TikTok and other social media platforms share wildly inaccurate tax advice. Some involve urging people to misuse common tax documents like Form W-2, or more obscure ones like Form 8944 involving a technical e-file form not commonly used by taxpayers. Both schemes encourage people to submit false, inaccurate information in hopes of getting a refund.

The IRS warns people not to fall for these scams. Taxpayers who knowingly file fraudulent tax returns potentially face significant civil and criminal penalties.

“Social media is an easy way for scammers and others to try encouraging people to pursue some really bad ideas, and that includes ways to magically increase your tax refund,” said IRS Commissioner Danny Werfel. “There are many ways to get good tax information, including @irsnews on social media and from trusted tax professionals. But people should be careful with who they’re following on social media for tax advice. Unlike hacks to fix a leaky kitchen sink or creative makeup tips, people shouldn’t rely on made-up ways on social media to patch up their tax return and boost their refund.”  (2)

Avoid Ghost Preparers

A common problem seen annually during tax season, “ghost preparers” pop up to encourage taxpayers to take advantage of tax credits and benefits for which they don’t qualify. These preparers can charge a large percentage fee of the refund or even steal the entire tax refund. After the tax return is prepared, these “ghost preparers” can simply disappear, leaving well-meaning taxpayers to deal with the consequences.

While most tax professionals offer quality service, these ghost preparers and other unscrupulous preparers try to take advantage of people and should be avoided at all costs. The IRS encourages people to use a trusted tax professional, and IRS.gov has important information to help people choose a reputable, accredited practitioner.

“Ghost preparers and other shady return preparers form a real threat every tax season to well-meaning taxpayers,” said IRS Commissioner Danny Werfel. “By trying to make a fast buck, these scammers prey on seniors and underserved communities, enticing them with bigger refunds by including bogus tax credit claims or making up income or deductions. But after the tax return is filed, these ghost preparers disappear, leaving the taxpayer to deal with consequences ranging from a stolen refund to follow-up action from the IRS. We urge people to choose a trusted tax professional that will be around if questions arise later.” (3)

Tips for taxpayers: Warning signs to look out for

Most tax return preparers provide honest, high-quality service. But some may cause harm through fraud, identity theft and other scams. Paid preparers must sign and include a valid preparer tax identification number (PTIN) on every tax return. A ghost preparer is someone who doesn’t sign tax returns they prepare. These unethical tax return preparers should be avoided, especially if they refuse to sign a complete paper tax return or digital form when filing electronically.

Taxpayers are also encouraged to check the tax preparer’s credentials and qualifications to make sure they are capable of assisting with the taxpayer’s needs. The IRS offers resources for taxpayers to educate themselves on types of preparers, representation rights, as well as a Directory of Federal Tax Return Preparers with Credentials and Select Qualifications to help choose which tax preparer is the best fit.

Some of the warning signs of a bad preparer include:

• Shady fees. Taxpayers should always ask about service fees. Shady tax preparers can ask for a cash-only payment without providing a receipt. They are also known to base their fees on a percentage of the taxpayer’s refund.
• False income. Untrustworthy tax preparers may also invent false income to try to get their clients more tax credits or claim fake deductions to boost the size of the refund.
• Wrong bank account. Taxpayers should also be wary of a tax preparer attempting to convince them to deposit the taxpayer’s refund in their bank account rather than the taxpayer’s account.

Good preparers ask to see all relevant documents like receipts, records and tax forms. They also ask questions to determine the client’s total income, deductions, tax credits and other items. Taxpayers should never hire a preparer who e-files a tax return using a pay stub instead of a Form W-2. This is also against IRS e-file rules. (3)

High Income Filers Vulnerable to Illegal Tax Schemes

For those with high incomes, they can be tempting targets for a variety of schemes and aggressive tax strategies designed to reduce taxes. These can take many different forms, ranging from inflated art donation deductions to aggressive charitable remainder annuity trusts and detailed shelters that maneuver to delay paying gains on property.

“High-income taxpayers can be vulnerable to being pulled into these aggressive schemes and scams,” said IRS Commissioner Danny Werfel. “Taxpayers should be extra careful on tax maneuvers that seem too good to be true. Beware of advertisements for seemingly ideal tax structures that distort tax laws and leave victims with civil or criminal tax penalties.” (4)

Improper art donation deductions

There are ways for taxpayers to properly claim donations of art. But some unscrupulous promoters use direct solicitation to promise values of art that are too good to be true.

These promoters encourage taxpayers to buy various types of art, often at a “discounted” price. This price may also include additional services from the promoter, such as storage, shipping and arranging the appraisal and donation of the art. The promotor promises the art is worth significantly more than the purchase price.

These schemes are designed to encourage purchasers to donate the art after waiting at least one year and to claim a tax deduction for an inflated fair market value, which is substantially more than they paid for the artwork. Promoters may suggest taxpayers donate art annually and allow them to buy a quantity of art that guarantees a specific deductible amount. Promoters may even arrange for certain charities to take the donations.

The IRS has a team of professionally trained Appraisers in art appraisal services who provide assistance and advice to the IRS and taxpayers on valuation questions in connection with personal property and works of art. (4)

Monetized installment sales

In these frequently shady deals, promoters look for taxpayers seeking to defer the recognition of gain upon the sale of appreciated property and then 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. (4)

Beware of Fake Charities

In natural disasters and other tragic events, it’s common for compassionate individuals to donate money to help the victims. Unfortunately, scammers often use fake charities as a cover to not only obtain money but also gather sensitive personal and financial information that can be exploited for tax-related identity fraud. (5)

Real tragedies; fake charities

During times of disasters, fake charities become a concern. These deceitful organizations are created by scammers who take advantage of people’s generosity. They solicit money and personal information to victimize individuals through identity theft.

When taxpayers decide to contribute funds or goods to an organization, they may qualify for a deduction on their tax return, but only if they itemize their deductions. It is important to remember that charitable donations are valid when directed toward IRS-recognized tax-exempt organizations. Individuals intending to donate can utilize the Tax-Exempt Organization Search (TEOS) tool on IRS.gov to ensure legitimacy.

Beware of scammers who might use email communications or manipulate caller IDs to deceive people into donating funds to charities. These fraudsters often target groups such as seniors and those with limited English proficiency.

Here are some helpful tips to avoid getting scammed:

• Don’t give in to pressure. Scammers often create situations to get people to make payments. Genuine charities are always grateful for donations. Donors should take their time and research before making a charitable contribution.
• Exercise caution when making donation payments. Avoid any charity that requests gift card numbers or wire transfers. It’s better to pay by credit card or check after ensuring the charity’s authenticity.
• Verify the legitimacy of the charity. Scammers often use similar-sounding names for charities to confuse people. Before donating, potential donors need to ask the fundraiser for the charity’s name, website and mailing address so they can independently verify its authenticity. Use the special IRS TEOS tool to verify if an organization is a legitimate tax-exempt charity.
• Avoid sharing too much information. Scammers are always on the lookout for both money and personal data. Never disclose Social Security numbers, credit card numbers or personal identification numbers. Only provide bank or credit card details after confirming the charity’s legitimacy. (5)

1 IRS, Dirty Dozen, https://www.irs.gov/newsroom/irs-kicks-off-annual-dirty-dozen-with-warning-about-phishing-and-smishing-scams#:~:text=One%20common%20example%20remains%20the,IRS%20and%20state%20tax%20agencies 11Jul2024

2 IRS, Dirty Dozen, https://www.irs.gov/newsroom/dirty-dozen-taking-tax-advice-on-social-media-can-be-bad-news-for-taxpayers-inaccurate-or-misleading-tax-information-circulating 11Jul2024

3 IRS, Dirty Dozen, https://www.irs.gov/newsroom/dirty-dozen-irs-urges-taxpayers-to-not-fall-prey-to-untrustworthy-tax-preparers-ghost-preparers-can-disappear-with-taxpayer-cash-information, 11Jul2024

4 IRS, Dirty Dozen, https://www.irs.gov/newsroom/dirty-dozen-high-income-filers-vulnerable-to-illegal-tax-schemes-face-risk-from-improper-art-donation-deductions-charitable-remainder-annuity-trusts-monetized-installment-sales,  11Jul2024

5 IRS, Dirty Dozen, https://www.irs.gov/newsroom/dirty-dozen-irs-warns-about-fake-charities-exploiting-taxpayer-generosity, 11Jul2024