12 of the Dirtiest Tax Scams & Schemes from the IRS
* This article was originally published on July 15, 2020. It has been updated for 2021.
While the pandemic once again disrupted the traditional April 15 Tax Day this year, the extra time was helpful for many. And even though tax season officially ended for the majority of taxpayers on May 17, it’s always a good idea to be on the lookout for fraudulent tax schemes to avoid.
From having your money — or more — stolen via phishing, phone, or social media scams to engaging in abusive tax arrangements, these schemes could leave you in hot water with the Internal Revenue Service (IRS). In fact, they could lead to a higher chance of being audited — or even fines and criminal charges.
The IRS releases its “Dirty Dozen” list each year to highlight the worst of these tax scams. And while many of these top schemes remain on the list from year to year, the IRS made some changes for 2021. In addition to separating the dozen into four categories, one of those categories was specific to covid-19: “pandemic-related scams.” Starting with this new category, let’s look at some of the tax schemes you should be aware of year-round.
These ruses made the IRS’s list this year due to frauds arising from the covid-19 pandemic.
1. Economic Impact Payment Theft
Economic impact payments (EIPs), commonly referred to as stimulus payments, were provided through the CARES Act. Scammers attempting to get their hands on eligible individuals’ payments used emails, phone calls, and text messages to access payments electronically as well as mail theft to steal actual checks.
2. Unemployment Fraud Leading to Inaccurate 1099-Gs
Also due to the pandemic, many individuals lost their jobs and turned to unemployment insurance. In addition to those who needed to rely on unemployment to make ends meet during a difficult time, fraudsters also claimed and received unemployment benefits using stolen personal information. Victims of these identity thieves then received — or will receive — Forms 1099-G reporting unemployment funds that they didn’t file for or receive.
Personal Information Cons
This set of scams includes those that the IRS explains as “unexpected” contacts via phone, text, social media, and email.
Phishing involves tricksters sending links to fake websites via email. These attacks have also broadened to include fraudulent text messages, calendar appointments, and social media posts. If you smell something fishy — like the promise of a big refund or someone claiming to be an IRS officer requesting banking information — do your due diligence. Check to ensure the contact is from a legitimate source, avoid clicking links or opening attachments, and report the fraud to the IRS.
Put simply, phone scams can be scary. Fraudsters claiming they work for the IRS call unwitting taxpayers with threats, like owing large sums, in attempts to steal personal information and money.
▶︎ Don’t forget that the IRS will never ask for payment via wire transfer, debit card, or gift cards — and they’ll never threaten taxpayers with immediate arrest. If you’re not sure who’s on the other end of the line, don’t provide the caller with any personal information. Instead, ask questions or just hang up.
5. Social Media Scams
In this type of fraud, scammers skim personal information from social media sites. They use this information against the victim or branch out, using the stolen information to appear as the victim and approach the victim’s contacts, attempting to scam them, too.
This tactic is most often used against companies in the financial, healthcare, and educational sectors and the people who work for such institutions. Fraudsters use phishing to trick employees to click links in emails, which download malware or ransomware onto their devices or systems. This software then locks up and holds victims’ software or files for ransom while the scammers demand money to return access to the users or threaten to release sensitive nonpublic information.
Ruses Focusing on Unsuspecting Victims
This set of scams includes those by predators wanting to take advantage of taxpayers.
7. Fake Charities
Considering donating to a charity … but it’s one you haven’t heard of before? Beware of solicitors from fake charities — even those with names that sound reputable. Scammers often use names similar to actual charities for their fakery. These frauds increased due to the generosity of many who wanted to help others during the pandemic and because of the ability to write off cash donations above the line.
▶︎ Before making your donation, you can check in on legitimate charities using the IRS’s Tax-Exempt Organization Search.
8. Immigrant/Senior Fraud
Fraudsters also target older taxpayers and those for whom English isn’t the preferred language. Scams in this category tend to be threatening toward vulnerable populations, like senior citizens and immigrants. The IRS is combating these scams by offering communication materials in the languages that taxpayers prefer and by offering seniors the use of Form 1040-SR.
Schemes that Persuade Taxpayers into Unscrupulous Actions
9. Offer in Compromise “Mills”
For those with tax debts, the IRS may offer to compromise on amounts owed, allowing taxpayers to pay less than the full debt amount. Some fraudsters aim to mislead indebted taxpayers by charging exorbitant amounts while promising to help the taxpayers settle for far less than they owe the IRS. However, many of the taxpayers these scammers target won’t qualify for compromise — or the fraudsters will charge for services that the taxpayers don’t need and could accomplish themselves.
10. Unscrupulous Tax Return Preparers
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11. Unemployment Insurance Fraud
Marking its second spot on the dirty dozen list for 2021, the following types of unemployment schemes include fraudsters collaborating with — or acting against — their employers:
- Identity-related fraud
- Employer-employee collusion fraud
- Misrepresentation of income fraud
- Fictitious employer-employee fraud
- Insider fraud
12. Promoted Abusive Arrangements
This subset of scams includes five false tax promotions. In addition to being tax cheats, those who sell these schemes often charge high fees. You can learn more about these illegitimate tax-due-reducing deals on the IRS website.
- Syndicated Conservation Easements
- Abusive Micro-Captive Arrangements
- Potentially Abusive Use of the U.S.-Malta Tax Treaty
- Improper Claims of Business Credits
- Improper Monetized Installment Sales
Protect Yourself from Scams
What can you do to avoid falling victim to a fraudster? The first step is to be aware of their malicious tactics — and keep an eye out for red flags.
To help avoid fraud, the IRS made Identity Protection PINs (IP PINs) available to all taxpayers this year. Each six-digit code is unique to a taxpayer, and the IRS will not accept tax returns on which an incorrect IP PIN is provided.
It’s also important to remember that taxpayers pay amounts due to the “United States Treasury” — and nowhere else. And the IRS’s main method of contacting taxpayers is through the United States Postal Service. They won’t reach out to taxpayers via social media, email, phone, or text. If an IRS official does come knocking, they’ll show you two forms of ID to prove their identity so you know they’re not a scammer.
And remember, you don’t have to go it alone. You can count on your financial planning team here at FPFoCo.
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