Many of same scams that appeared on the 2021 list also appear on the 2022 list, meaning that these scams consistently, continuously and successfully trap unsuspecting victims year after year. 

Each year, we share with you what the IRS calls its “Dirty Dozen” list of tax scams. This year, the continued effects of the pandemic have given rise to new and even more sophisticated scams. The scams on the 2022 IRS Dirty Dozen list can be encountered at any time during the year and, in fact, are occurring with increasing frequency. With numerous tax-related changes as well as economic conditions continuing to impact taxpayers, 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. Although phishing scams remain a common means to victimize taxpayers, they have dropped to No. 8 from No. 3 in order of prevalence. This year, more than in prior years, the IRS is highlighting new scams that taxpayers should be aware of. In fact, new scams now occupy the top four spots on the Dirty Dozen list. As expected, as the country continues to recover from the effects of a global pandemic, dangerous scams associated with the impacts of COVID-19 continue.

How the 2022 List Compares to the 2021 List

Many of same scams that appeared on the 2021 list also appear on the 2022 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.

As we reported previously in Alerts from 2020 and 2021, these types of schemes tend to rise during crises as scammers rely on the pandemic, natural disasters and IRS staffing shortages to steal money and personal information from taxpayers. Below are the IRS Dirty Dozen tax avoidance and fraud scams for 2022.

1. Use of CRAT to Eliminate Taxable Gain

One of the more recent scams rising from the pandemic presents a false opportunity for those with appreciated property to eliminate their taxable gain through the use of a Charitable Remainder Annuity Trust (CRAT). Taxpayers would hope to eliminate their gain by transferring their appreciated property to the CRAT and having it sell the property for a single premium immediate annuity that would pay the taxpayer over a period of time. This is done through a misapplication of law relating to CRATs and inaccurately avoiding tax liability.

The IRS reminds taxpayers to watch out for and avoid advertised schemes, many of which are now promoted online, that promise tax savings that are too good to be true and will likely cause taxpayers to legally compromise themselves.

2. Foreign Pension Arrangements Misusing Treaty Benefits

In this scam, taxpayers hope to avoid U.S. tax by making contributions to certain individual retirement accounts in Malta and other foreign countries. Most of the time, these accounts do not limit the amount of contributions based on income earned from employment or self-employment activities. By improperly labeling this account as a pension fund for U.S. tax purposes, the taxpayer falsely claims an exemption from U.S. income tax on both the earnings and distributions from the foreign account.

Taxpayers must be especially vigilant for highly questionable but enticing online advertisements that make extraordinary promises. If they promise no income tax on the earnings and distributions from these retirement accounts established in Malta and other foreign countries, it is too good to be true.

3. Foreign Captive Insurance

These transactions involve U.S. owners of closely held entities claiming to enter into an insurance agreement with a Puerto Rican or foreign corporation with arrangements in which the U.S. owner has financial interest. The U.S. owner claims deductions for the “insurance coverage” and reinsures the “coverage” with the foreign corporation.

The IRS highlighted some characteristics of this scheme to look out for: Implausible risks covered, lack of arm's-length pricing and lack of business purpose for entering into the arrangement.

4. Monetized Installment Sales

Individuals involved in these transactions incorrectly use installment sale rules to enter into a contract and sell their appreciated property to a buyer for cash and then purport to sell the same property to an intermediary for an installment note. The intermediary then purports to sell the same property to the buyer and receives the cash purchase price. The seller receives an amount equivalent to the sales price, less fees, in the form of a nonrecourse and unsecured purported loan.

The IRS urges taxpayers to stop and think twice before including these questionable arrangements on their tax returns. Taxpayers are legally responsible for their return, not some promoter making promises and charging high fees. Taxpayers can help stop these arrangements by relying on reputable tax professionals they know they can trust.

5. Pandemic-Related Scams

The IRS reminds taxpayers that criminals still use the COVID-19 pandemic to steal people’s money and identity with bogus emails, social media posts, and unexpected phone calls, among other things. The IRS urges taxpayers to lookout for:

Economic Impact Payment and Tax Refund Scams

One of the most popular threats, 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. 

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 for 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 look out 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.

Fake Employment Offers Posted on Social Media

Fake job posts entice victims to provide their personal financial information, which can be used by criminals to file a fraudulent tax return for a fraudulent refund or be used in some other criminal endeavor.

Fake Charities That Steal Your Money

The IRS continues to warn of an increase in fake charities in the continued 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, only scammers will.

Another tactic 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.

6. 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 interested taxpayers who may qualify for an OIC, we recommend professional representation from experienced CPAs or tax lawyers, such as those in our National Tax Controversy Group, as OICs are complex and pose challenges for inexperienced taxpayer.

7. Suspicious Communications

The IRS urges everyone to verify a suspicious email or other communication independently of the message in question. If you are surprised or scared by a call or text, it's likely a scam―so proceed with extreme caution. The IRS initiates most contact through mail and not through emails or texts. The IRS reminds everyone not to click links or open attachments in unsolicited, suspicious or unexpected text messages whether from the IRS, state tax agencies or others in the tax community. Additionally, the IRS does not leave prerecorded, urgent or threatening messages. In many variations of the phone scam, victims are told if they do not call back, a warrant will be issued for their arrest. Other verbal threats include law enforcement agency intervention, deportation or revocation of licenses.

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.

8. Spear Phishing

Spear phishing is an email scam that attempts to steal a tax professional's software preparation credentials. These thieves try to steal client data and tax preparers' identities in an attempt to file fraudulent tax returns for refunds. Spear phishing can be tailored to attack any type of business or organization, so everyone needs to be cautious and not rush to act when a strange email comes in. Some phishing emails use the IRS logo and may have subject lines such as “Action Required: Your account has now been put on hold.”

The IRS warns tax pros not to respond or take any of the steps outlined in the email. Similar emails include malicious links or attachments that are set up to steal information or to download malware onto the tax professional's computer.

9. Concealing Offshore Accounts and Digital Assets

The IRS remains focused on stopping tax avoidance by those who hide assets in offshore accounts and in accounts holding cryptocurrency or other digital assets. New patterns and trends emerging in complex international tax avoidance schemes and cross-border transactions have heightened concerns regarding the lack of tax compliance by individuals and entities with an international footprint. As international tax and money laundering crimes have increased, the IRS continues to protect the integrity of the U.S. tax system by helping American taxpayers to understand and meet their tax responsibilities and by fairly enforcing the law worldwide.

Digital assets are being adopted by mainstream financial organizations along with many other parts of the economy. The rapid increase of digital assets across the world in the last decade or so has created tax administration challenges, in part because there is an incorrect perception that digital asset accounts are undetectable by tax authorities. Unscrupulous promoters continue to perpetuate this myth and make assertions that taxpayers can easily conceal their digital asset holdings. The IRS urges taxpayers to not be misled into believing this storyline about digital assets and possibly exposing themselves to civil fraud penalties and criminal charges that could result from failure to report digital asset transactions.

10. High Income Nonfilers

The IRS continues to focus on people who choose to ignore the law and not file a tax return, especially those individuals earning more than $100,000 a year. Here's a key reminder for taxpayers who may be wrongly persuaded that not filing their return is a smart move: The failure-to-file penalty is initially much higher than the failure-to-pay penalty. It is more advantageous to file an accurate return on time and set up a payment plan if needed than to not file. The failure-to-pay penalty is generally 0.5 percent of the unpaid taxes for each month or part of a month the tax remains unpaid. The penalty will not exceed 25 percent of unpaid taxes.

The failure-to-file penalty is generally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. The penalty generally will not exceed 25 percent of unpaid taxes. If a person's failure to file is deemed fraudulent, the penalty generally increases from 5 percent per month to 15 percent for each month or part of a month the return is late, with the maximum penalty generally increasing from 25 percent to 75 percent.

11. Abuse of Syndicated Conservation Easements

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 that 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 result in the taxpayer recording large deductions. In the last five years, the IRS has examined many hundreds of syndicated conservation easement deals where tens of billions of dollars of deductions were improperly claimed. The IRS examines 100 percent of these deals and plans to continue doing so for the foreseeable future. Hundreds of these deals have gone to court and hundreds more will likely end up in court in the future.

12. Abuse of Microcaptive Insurance Arrangements

In abusive "microcaptive" 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. The "premiums" paid under these arrangements are often excessive and are used to evade tax laws.

The IRS urges taxpayers to avoid becoming ensnared in these deals sold by unscrupulous promoters. People can risk severe monetary penalties for engaging in questionable deals such as abusive syndicated conservation easements and microcaptive insurance arrangements.

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 2021 vs. 2022 Dirty Dozen Comparison 

 

Reminder of Seven Things the IRS Will Never Do

• The IRS will never call you to demand immediate payment.
• 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.

TAG's Perspective

As we have been cautioning our clients and friends for years now, never respond to unsolicited emails, texts or phone calls about your taxes, finances and related personal and intimate matters. 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 important than ever due to the COVID-19 pandemic and current economic conditions, 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 may make taxpayers more likely to believe fraudulent IRS correspondence.

For More Information

If you would like more information about this topic or your own unique situation, please contact John I. Frederick, Steven M. Packer or any of the practitioners in the Tax Accounting Group. For information about other pertinent tax topics, please visit our publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.