Each year, we share with you what the IRS calls its “Dirty Dozen” list of tax scams. This year, the pandemic has given rise to new, and even more sophisticated scams. The scams on the 2021 IRS Dirty Dozen list can be encountered at any time during the year, but they peak during tax season(s). With numerous changes impacting taxpayers due to the global pandemic such as extended and inconsistent tax deadlines, various stimulus payments, COVID-related unemployment or economic hardship payments, tax scams continue to occur at an alarming rate and an increasing number of people fall prey to these scams. Don’t be one of them. If it sounds too good to be true, it probably is.
Some scams are complex, with sophisticated algorithms being used to steal identities. Other scams are as simple as picking up the telephone to trap unaware and unsuspecting taxpayers. Once again and not surprisingly, phishing and phone scams are two of the most prevalent ways in which taxpayers have been victimized. As expected, as the country continues to recover from the effects of a global pandemic, many entries on this list are associated with the impacts of COVID-19.
How the 2021 List Compares to the 2020 List
Many of same scams that appeared on the 2020 list also appear on the 2021 list, meaning that these scams consistently, continuously and successfully trap unsuspecting victims year after year. Phishing schemes once again appear on the list, with new variations appearing annually.
However, this year the IRS has grouped the list into four distinct categories—pandemic-related scams; personal information cons; ruses focusing on unsuspecting victims; and schemes that persuade taxpayers into unscrupulous actions—warning about schemes based on who the likely perpetrators are as well as who is mostly impacted. As we reported previously, there tends to be an increase in these types of schemes during times of crisis as the IRS has seen scammers attempting to use the pandemic and natural disasters to steal money and personal information from taxpayers.
1. Economic Impact Payment Theft
One of the more recent threats that has arisen in the wake of the pandemic, and a huge opportunity for identity thieves, are attempts to steal the Economic Impact Payments (stimulus payments) of taxpayers. The IRS urges taxpayers to be wary of text messages, emails or random calls requesting that they click a link or voice verify data to provide any type of personal information. Taxpayers should also vigilantly check their mailbox if they expect to receive any such payments via direct mail.
2. Unemployment Fraud Leading to Inaccurate Taxpayer 1099-Gs
Due to the COVID-19 pandemic, many taxpayers have lost their jobs and thus may be eligible to be issued unemployment income from their respective state. However, identity thieves have used this uptick in unemployment to their advantage by filing fraudulent unemployment claims (at times, working with employers and financial institutions) on behalf of taxpayers who have not filed unemployment claims and whose personal information they’ve stolen. Of course, in this situation the actual taxpayer made no such claim and the income payments go directly to the scammers.
The IRS urges taxpayers to lookout in the mail for form 1099-G, which may be reporting unemployment income that they did not receive. If this is the case, the taxpayer should contact their respective state agency, as well as their tax professional, in order to have a corrected form issued.
Personal Information Cons
The IRS once again has included phishing scams as one of the most prevalent threats, warning taxpayers, including individuals, 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.
The IRS has issued additional caution to tax professionals, as the agency has seen a rise in scams aimed at preparers. One prominent scam has been fraudulent emails from “IRS Tax E-Filing” requesting information related to Electronic Filing Identification Numbers and Centralized Authorization File Numbers. Another scam aimed at tax preparers is the “New Client” scam in which an unknown email will be sent to a tax professional claiming to be a prospective new client needing assistance. The email will often include attachments masked as supporting documents such as prior year returns or correspondence from a tax authority. We have seen these phishing emails, and are well protected, as our systems and professionals easily flag them for immediate deletion and placement on our blocked senders list, as well as reporting to the authorities when appropriate. The IRS reminds all taxpayers to not open attachments from sources in which they are not familiar.
4. Threatening Impersonator Phone Calls or Voice-Related Vishing
The IRS is warning taxpayers to be wary of scam attempts via phone calls in which the perpetrator claims to be from the IRS. The scammer then attempts to coax money or personal information from the taxpayer by claiming that a bill or tax remains unpaid. The caller will threaten actions such as arrest, penalties and fines, or license revocation if immediate action is not taken by the taxpayer. The IRS observed a 14 percent increase in these “vishing” scams in 2020, many of which were those claiming to be related to a federal tax lien.
It is crucial to remember that an IRS agent will never demand immediate payment or request financial information over the phone. Should you receive such a call, hang up immediately.
5. Social Media Scams
With the prevalence of social media, the IRS is also warning taxpayers of scams stemming from any number of platforms. Perpetrators are using the abundance of personal information housed within these social media sites to send emails, texts or social media messaging posing as a close friend or family member and focus on pandemic related events.
This type of identity theft is becoming more common, as perpetrators will use personal information extracted from a social media site in order to convince someone that they are you (friends, family, co-workers). The scammers will often send an email asking for help or soliciting donations for a charity pretending to be you in the hopes that the recipient will open the link provided and themselves be infected with harmful malware. It is critical that users of social media platforms carefully review privacy settings so as to limit the data that is publicly shared.
The IRS warns of a growing type of malware, many of which have been in recent news headlines, that does not rely on the user unwittingly downloading the virus, but instead searches for weak security or other vulnerabilities. Once the criminals have gained access to the taxpayer’s information, they will lock or encrypt the data so that the person cannot access their own information until they pay the perpetrator the “ransom” that they request, threatening to publicly disclose any information obtained. The IRS urges taxpayers and tax professionals to utilize multifactor authentication as one of the strongest means by which to protect against such attacks.
Ruses Focusing on Unsuspecting Victims
7. Fake Charities
The IRS continues to warn of an increase in fake charities in the wake of the COVID-19 pandemic, tragedies and natural disasters. Fraudulent charity schemes like these generally become more prevalent in times of hardship or tragedy in an attempt to exploit well-intentioned people trying to help those in need.
The IRS urges taxpayers to be wary of unsolicited donation requests from charitable organizations, even those that seem legitimate. Genuine charities should be able to provide their employer identification number (EIN) on request, which can be confirmed with the search tool on IRS.gov. Legitimate charities will also never request that patrons pay through gift cards or by wiring money, as these are common forms of payment requesting by scammers.
Another tactic being used by criminals is to send an email or message with a link to something of personal interest to the taxpayer, but instead actually contains malware that grants access to their personal information.
8. Senior/Immigrant Fraud
The IRS advises senior citizens and those who care for them to be wary of scams targeting the elderly. Seniors have long been one of the most heavily targeted groups for these types of scams. As their comfortability with social media and burgeoning technologies increases, it potentially opens up new avenues by which scammers can target them.
The IRS alerts taxpayers that scammers have also been known to target those with limited proficiencies in English. Similar to the threatening impersonator phone calls described above, these scams typically come in the form of threatening phone calls from someone claiming to be from the IRS. In these cases, however, the perpetrator will likely threaten jail time or deportation if the demands are not met.
The IRS has added new features to assist those for whom English is not their primary language. The completion of Schedule LEP, to be filed with the taxpayers’ tax return, allows a taxpayer to choose the language in which they would be most comfortable communicating. Once submitted, all future communications from the IRS should be in that selected language.
9. Unscrupulous Return Preparers
Selecting a tax return preparer is among the most important decisions you can make, as preparers are entrusted with a taxpayer's sensitive personal data. Most tax professionals provide honest, high-quality service, but dishonest preparers pop up every filing season committing fraud, harming innocent taxpayers or convincing taxpayers to engage in illegal, tax evasion oriented transactions which will attract the ire of the IRS, at best, and land unsuspecting taxpayers in jail, at worst. The IRS advises taxpayers to choose tax return preparers carefully.
Taxpayers hiring professionals should always ensure that the preparer has a valid PTIN (Preparer Tax Identification Number), is willing to sign the return, and is inputting accurate income and deduction information in completing the return.
10. Unemployment Insurance Fraud
While there are numerous forms that these scams can take, the general idea is that it involves a taxpayer, either against or with their employer, attempting to obtained financial assistance to which they would otherwise not be granted. Here are some examples:
- Identity-related fraud—As previously mentioned, this involves the perpetrator using stolen identity information to apply for unemployment payments.
- Misrepresentation of income fraud—After receiving legitimate assistance, the taxpayer returns to work but fails to report the income in order to continue receiving unemployment compensation. This could also include inflating the income reported previously so as to increase the unemployment insurance payments.
Schemes that Persuade Taxpayers into Unscrupulous Actions
11. Offer in Compromise Mills
The IRS counsels taxpayers to be wary of offers to eliminate or settle tax debts through an offer in compromise (OIC). What makes this scam difficult is that OICs are in fact a legal means by which the IRS can help taxpayers who meet very specific criteria to lower their tax bill. The scammers promise the taxpayer acceptance into the program and collect fees to churn out applications that are highly likely to be denied. For taxpayers who may qualify and have interest in an in pursuing an OIC, we recommend professional representation from experienced CPAs or tax lawyers, such as those in our National Tax Controversy Group, as OICs are a complex process fraught with traps for the inexperienced taxpayer.
12. Aggressively Marketed Abusive Arrangements
The IRS warns taxpayers to be on the lookout for promoters of tax arrangements that seem too good to be true. These schemes typically stem from abusive arrangements which look to “game the system” and result in significant deductions that would otherwise not be available to the taxpayer. These promoters tend to market these deals vigorously, often lying about their legitimacy and charging taxpayers large fees.
One example would be a syndicated conservation easement, wherein inflated appraisals of undeveloped land or business entities results in the taxpayer recording large deductions. Another prominent example would be improper monetized installment sales, which results in the taxpayer incorrectly deferring recognition of gain upon the sale of appreciated property for years.
There may be some taxpayers tricked into believing these schemes are legitimate, but there are also many who know that these arrangements are shady and simply plan to take their chances with the “audit lottery.” Either way, the IRS recommends that any person who participated in one of these abusive arrangements should seek counsel regarding coming into compliance.
The 2020 vs. 2021 Dirty Dozen Comparison
The IRS will never call you to demand immediate payment.Reminder of Seven Things the IRS Will Never Do:
- The IRS will never demand a specific method of payment (prepaid debit card, gift card, wire transfer, etc.).
- The IRS will never call about taxes owed without first having mailed you a bill.
- The IRS will never demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
- The IRS will never ask you for credit or debit card numbers over the phone.
- The IRS will never threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.
- The IRS will never call you to discuss an unexpected refund.
As we have been cautioning our clients and friends for years now, never respond to an unsolicited email, text or phone call. That is, if you did not initiate the discussion, whether an email or text or phone call, etc.―don't proceed, don’t respond. Just hang up or delete it. This simple approach avoids ugly consequences. These words of caution are more prevalent than ever due to the COVID-19 pandemic, because fear and uncertainty may make taxpayers more susceptible to scams, and more business is being conducted remotely, which leads to a greater risk of fraudulent emails or phishing schemes. Additionally, potential forthcoming tax law changes proposed by the Biden Administration and talks of additional stimulus (such as the monthly payments associated with the Child Tax Credit) may make taxpayers more likely to believe fraudulent IRS correspondence.