In this episode of The Standard Deduction, Tax Directors Candace Varner and Ben Hake discuss the IRS’ “Dirty Dozen” list – trending tax scams, schemes, and offers that sound too good to be true – and what you need to know to steer clear of trouble.
Official IRS website to search for tax exempt organizations/charities: https://www.irs.gov/charities-non-profits/search-for-tax-exempt-organizations
The Standard Deduction podcast is hosted by Tax Directors Candace Varner and Ben Hake. This podcast is a thoughtful, informed discussion about ideas, trends and developments in taxes related to personal wealth management.
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Ben Hake: Hello and welcome to The Standard Deduction. I’m Ben Hake.
Candace Varner: And I’m Candace Varner. I hope everyone is enjoying their summer. I know we certainly are because there are no tax deadlines this summer, whereas last year we had a July tax deadline. July is usually my favorite month to be a tax accountant, so I’m happy to have it back.
Ben: I’m shocked it’s not April, but I guess we each enjoy different things. Today, we are here to talk about what the IRS calls the “dirty dozen.” This is a list they put out every year that’s the items they’re looking at, things they want taxpayers to be aware of, or just things of that nature. But it’s got items that will really impact taxpayers across the entire income scale. So from low income to incredibly wealthy individuals, as well.
Candace: The list is broken down into four main categories. The first one we’re going to talk about is pandemic-related scams. Obviously, very specific to 2020 and 2021. The first item would be the economic impact payments, or what we would call stimulus payments. Over the past 15 months or so there’s been three different rounds of these, and now, as we talked about on our last podcast, there’s advanced payments of the Child Tax Credit. Each of the rounds of stimulus is calculated a little bit differently based on different income thresholds. Some people get their checks on paper, some people are getting direct deposits, some people are getting a little bit of both. All of that has led to a lot of confusion, understandably. But because there’s a lot of confusion, it’s also ripe for scammers to be able to prey on people’s lack of understanding of what’s going on. You’re seeing scammers who will contact clients or taxpayers and say that they want to talk to them about their payment, or they want to make sure that they get it, and they’re asking for financial information.
This is where we’ll start, a theme that you’ll hear over and over again today. The IRS will never initiate contact with you via phone, email, text, definitely not social media, so if you’re getting a call from someone who claims that they’re at the IRS, immediately, you should just assume that it’s not valid. You should delete any messages you get that are saying they’re from the IRS. Don’t open any attachments, anything like that. This is true for the economic income payments, as well as essentially any other time that the IRS is going to contact you. It is possible that at some point you will have a call with an IRS agent and, of course, there’s ways to call them, but they’ll never initiate contact that way. It’s always going to be a letter. For the stimulus payments specifically, the IRS has a website where you can actually go and check the status of them and find out other information. That’s where I would direct everyone to start if you want to double check something or if you have any questions, but if anyone’s reaching out to you about that, you can assume that that is not valid.
The next one that’s specific to the pandemic would be unemployment fraud. Again, we see this sometimes in normal years, but significantly more in 2020. Essentially, when the pandemic first hit, all of the state unemployment offices across the country were just bombarded with claims, rightfully so. They’re trying to balance an overworked system with getting money to the people who need it as soon as possible. That’s always a difficult balance. The information you need in order to file for unemployment is sometimes personal data the scammers already have access to. We’re seeing a lot of false claims being sent through state departments of labor. Someone filed an unemployment claim on my behalf, I was notified by our HR rep. I’m pretty sure I still work here, but I could be wrong. Just doing this podcast for fun, I guess.
We saw these all over last year. They’ve slowed down a little bit in 2021, but essentially, the way that you’re going to see… If you aren’t notified by your HR that this claim has been filed on you, what you might see earlier in 2021 was a form 1099-G. What that is is basically like any other 1099 you receive related to your taxes that shows the total income that you should report on your tax return. We had clients receive these saying, “I got this, but I didn’t actually file unemployment and I definitely didn’t receive any unemployment benefits.” That’s a tip off that there was a claim filed under your name that was not valid. Two things to know about that. One, reach out to the state department and try to get a corrected version, or at least let them know that that was not accurate that that claim was filed.
Then two, do not report that income on your tax return. If it was not income you actually received, then you should not be reporting it. Don’t panic that it’s wrong, but just do not include it and try to get a corrected form issued by your state agency. With the pandemic, lots of opportunities for scammers to confuse people or file stuff on their behalf. Ben, next category is unsuspecting victims, not dissimilar from what I was talking about.
Ben: I was just saying, a lot of these are similar in the intent on what the person’s trying to do to a taxpayer, but aren’t necessarily specific like stimulus payments and unemployment fraud. One of the big ones, which is unfortunate that we’re seeing, is the rise and the uptake of a fake charity. Obviously, with the pandemic, a lot of charitable organizations still are in more need of the support than normal, but it was also resulting in people basically trying to attempt to defraud people by calling and soliciting donations. The first thing we always tell people, and as a lot of people who donate will know, is once you donate to one organization, a lot of times you’ll start to get more unsolicited donation requests, so consider how they’re contacting you. It’s pretty uncommon to get a cold call or a random phone call from an organization asking for money. They’re making it sound very urgent in need.
Any organization that’s charitable, you should be able to ask… Or if you’re suspicious about it, ask for the full name of the organization, the website, and the contact information to be able to get back in touch with them after you’ve researched it. If they are very insistent or they’re trying to pressure you to make the donation immediately, that’s normally going to be a tip-off that maybe it’s not valid. If you’re very concerned about it, ask for the organization’s exact name. The IRS actually has a tool on their website, which we’ll include in the podcast description, that you can type in their name or their tax ID number, which they should be able to provide you, and it’ll tell you their exact status with the IRS as of that moment in time. If you have an organization, you think, “Hey. I’m unfamiliar with them.” That’s also another great way to make sure that, “Hey, if I donate to them, it’s a real public charity. I’m going to be entitled to the charitable deduction.”
The other thing that may seem obvious is consider how they’re requesting the funds for the donation. If they’re asking for it in an odd manner like gift cards or direct wire transfers from a bank, again, generally a tip off that something may not be correct there. The next one we see is probably something that people have gotten calls about over the last what feels like five years. But it’s going to simply be people trying to imitate the IRS. Now, they’re, generally speaking, targeting two groups of individuals. That’s going to be seniors or older taxpayers, and then also immigrant or taxpayers whose English is not their first language. A lot of the time, again, as Candace mentioned, the biggest tip off is the IRS will never call you directly to initiate contact. Somebody calls and says, “Hey, there’s a court case, or there’s a tax liability. We need to resolve this immediately because it’s urgent.” That is almost always going to be a fraudulent event.
Make sure that if you get that, again, hang up. You don’t need to be talking to those individuals. For taxpayers who English isn’t their first language, again, sometimes they’re trying to pressure those individuals who maybe feel uncomfortable saying no, to be able to do that sort of thing. One item where the IRS will actually help taxpayers in this situation is they have a form, it’s Schedule LEP, where you can indicate your preferred language when they communicate with you. There’s 26 or 28 different languages listed on there. Once you’ve selected that and sent it back to the IRS, anytime they can try and communicate with you via the mail, which is legitimate, they’ll do it in your native language, which would make it easier to move forward and consider everything.
The next one that we’ve been seeing, and this is probably one you’ll see on the radio or hear on the news, is that “offer in compromise mill,” or the idea that you may owe the IRS hundreds of thousands of dollars and we’ll settle it for pennies on the dollar to be able to do that. A lot of the times, those organizations have very high upfront fees that you have to pay before they’ll do anything, and they do not guarantee any of their results. The IRS has a website for offers in compromise where basically, they’ll work with you given your financial situation. They’ll create a payment plan to get you at whole with the IRS again. A lot of those are free for taxpayers. There may be a fee to the IRS, but there’s no fee for professionals that you can do. It will also lay out the various criteria to qualify for them. Another thing that those offer in compromise mills will do is they’ll apply for every form of settlement with the IRS, even though the taxpayer may not qualify for any of them. But again, that fee is paid upfront and there’s no guarantee that you’ll be able to benefit from those programs.
The final item, which hopefully, less and less people are running into, is going to be the idea of a ghost preparer. It’s somebody who prepares your tax return but says, “Hey, I’m not going to sign that. Don’t put my name anywhere on it.” A lot of the times that’s going to also be ones where, similar to what Candace was mentioning, you’ll see stimulus payment fraud, where they’re trying to claim somebody’s stimulus payment, they’re claiming extra dependents, things of that nature. Again, if you’re working with a tax preparer and they won’t sign the return, that’s almost always a tip off that something is wrong and maybe we should be looking at a different source. Candace, all this has been fascinating, but what else is there? What else does the IRS think we should be concerned about?
Candace: Well, the next category is called personal information cons. But a lot of this is very similar to the stuff that we’ve been talking about. This stuff is related to taxes because the IRS put out this list, but also all financial information in general. Impersonator calls, like you mentioned, people calling and claiming to be from the IRS. Claiming to say there’s a tax lien against you. Really making everyone panic, but again, the IRS won’t call you. We’re seeing social media being used, where if they can actually get into your account, they’ll try to reach out to your family or friends and it appears that it’s coming from you because now they’re in your social media account and they’ll send them malicious links, or ask for personal information, and that kind of thing. All ways to just gather information about you that they can use to then either file fraudulent returns, claim unemployment benefits, all those kinds of things.
We’re also seeing a lot more phishing scams that are targeted at tax professionals specifically. It’s one thing to try to get information from an individual person, person by person, but there’s actually a lot of information that we have access to. Based on all of our clients that we work with, if they can use a scam to get into an organization and get all of that financial information, they can get a lot more bang for their buck, if they will. Now, all of us here obviously know that the IRS will not be emailing us. That’s a little easier for us to know than the average taxpayer, but it’s still important to look out for and talk to your IT department, have good policies in place, and make sure that there are restrictions and gatekeeping to get into the organization’s information. Not specific to tax, but just generally in financial institutions, we’re seeing more ransomware issues.
You’re probably seeing those in the news, too. They’re definitely going after companies and institutions moreso than individuals now to try to get a larger scope. All of those things are just things to keep in mind as you’re interacting using social media, taking calls, all that kind of stuff. Ben, our last category: abusive arrangements. That sounds pretty exciting.
Ben: Well, yes. This is probably of the dirty dozen where we see the most change because this is going to be the “cutting edge” of tax arrangements, where attorneys and CPAs will devise a method with which to give a tax benefit that may be is outsized for what you’re doing. The ones that are very frequently brought up nowadays is going to be the idea of a conservation easement, which was when you invest in a piece of land that’s subsequently donated. You may invest $1 and be able to get a charitable deduction in excess of $4 or $5, so your tax savings are greater than the amount you paid. We’ve got some that are going to be like a self-insurance arrangement where you pay to insure a risk, but because you’re the insurer, you also get to benefit from that. There’s almost always seems like there’s going to be a foreign country or jurisdiction that has a tax treaty with what is a very gray area. Right now it’s the country of Malta that a lot of taxpayers are looking at in terms of trying to get IRA funds out of their account.
Then the other one is going to just be claiming benefits you’re not entitled to. There’s a variety of credits for research and development, green energy, all sorts of things like that. Sometimes you’ll have taxpayers who are claiming those even though they haven’t done the underlying action to be able to get those. I mentioned earlier that this list is constantly evolving and changing, and the IRS is aware that as these things grow and become more popular, more taxpayers get involved in them. A lot of the times they’ll designate these as a reportable transaction. Instead of just investing in one of these things, reporting it on your return, and because the IRS is slightly understaffed and under-budget right now, hoping that you just fly under the radar. Each of these types of transactions, once they’re identified, you’re legally required to include a form basically detailing everything about it: how you found out about it, all the related parties, how much everybody was compensated, all those sorts of things.
This is something that as you get involved with them, you’re not just hoping to fly under the radar, but instead you’re highlighting the transaction and telling the IRS, “You might want to look at this.” Again, most of these will change over time. Not every taxpayer will see them. But if you see something that you’re like, “Hey, that’s incredible. I’m saving more money than I’m spending.” Maybe just take a step back and think, “Will the IRS actually agree with what I’m doing?”
Candace: Because ultimately taxes, like a lot of things, if it seems too good to be true, it probably is.
Ben: Yeah. As I tell a lot of my clients, if you hear that stuff and you’re like, “Man, this is really exciting.” The only time taxes should be exciting is the 10 minutes during this podcast.
Candace: Well said, Ben. Thank you. That’s it for us for another episode of The Standard Deduction. Thank you so much for joining us.
Disclosure: This commentary is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed.