Supersized ‘Dirty Dozen’ highlight top tax tricks and abuses

By Dave Strausfeld, J.D., and Paul Bonner

The IRS's annual "Dirty Dozen" (actually, this year, 16) list of tax-related scams and schemes for 2021 spotlighted "pandemic-related scams," "personal information cons," "ruses focusing on unsuspecting victims," and "schemes that persuade taxpayers into unscrupulous actions."

Pandemic-related scams

1. Economic impact payment theft: Most economic impact payments, also known as stimulus payments, are made electronically by direct deposit to taxpayers' bank accounts, but even these can be diverted by thieves, the IRS noted, and those paid by check can be stolen from mailboxes.

2. Unemployment fraud: The IRS reminded taxpayers to be alert to identity theft related to unemployment benefit payments. In many cases, the thieves filed fraudulent unemployment benefit claims using stolen personal information of individuals who did not file claims. The owners of that information in many cases received Form 1099-GCertain Government Payments, reporting unemployment compensation income that they did not in fact receive.

Personal information cons

3. Phishing: The IRS warned individuals to be vigilant for sham emails or websites looking to steal victims' personal data and potentially infect their devices by convincing them to download malicious programs. The Service noted that some phishing scams target tax professionals, such as by seeking to trick practitioners into clicking on innocent-looking attachments in emails purportedly from a new client. Another ploy mimics verification of electronic filing identification numbers (EFIN) and Centralized Authorization File (CAF) numbers.

4. Vishing: The IRS said that "vishing," or voice-related phishing, is on the rise, particularly scams related to federal tax liens.

5. Social media scams: Taxpayers also should be aware of tax scams that rely on social media, the IRS said. Some con artists send emails impersonating the victim's family, friends, or co-workers, relying on information extracted from an individual's social media accounts. One way to protect against these schemes is to review privacy settings and limit data that is publicly shared.

6. Ransomware: This form of malicious software (malware) is used to extort ransom payments from victims in exchange for decrypting the information and restoring victims' access to their systems or data. Ransomware attacks continue to rise across various sectors, particularly governmental entities, as well as financial, educational, and health care institutions, the Service noted.

Ruses targeting unsuspecting victims

7. Fake charities: The IRS advised taxpayers to beware of spurious appeals for donations by scammers who set up what may appear to be a charitable organization but in fact is a swindle. The IRS advised individuals not to feel pressured into giving and to research a recipient organization by its exact name using corroborating sources of information.

8. Immigrant/senior fraud: Seniors and groups with limited English proficiency should keep in mind they may be targets of tax-related scams that may include threats, the IRS advised.

9. Offer-in-compromise (OIC) "mills": Some OIC operations imply or promise they can settle debts for "pennies on the dollar" but rarely deliver, often while charging excessive fees. The IRS advised taxpayers owing a tax debt to do their own research on the OIC criteria and procedure.

10. Unscrupulous tax return preparers: The IRS also warned against "ghost" income tax return preparers, meaning those who refuse to digitally or manually sign the returns they prepare.

11. Unemployment insurance fraud: Some individuals have connived with or against employers and financial institutions to obtain state and local assistance to which they are not entitled, the IRS said.

Schemes that persuade taxpayers into unscrupulous actions

12. Syndicated conservation easements: "Promoters take a provision of tax law for conservation easements and twist it through using inflated appraisals of undeveloped land and partnerships," the IRS warned. "These abusive arrangements are designed to game the system and generate inflated and unwarranted tax deductions, often by using inflated appraisals of undeveloped land and partnerships devoid of a legitimate business purpose."

13. Abusive microcaptive arrangements: In these structures, "promoters, accountants, or wealth planners persuade owners of closely held entities to participate in schemes that lack many of the attributes of insurance," often with questionable coverage and inflated premiums, the IRS said.

14. Misuse of the United States—Malta tax treaty: Some taxpayers, invoking the U.S.—Malta income tax treaty, contribute appreciated property to certain Maltese pension plans and claim to have no tax consequences when the plan sells the assets and distributes proceeds to them.

15. Improper claims of business credits: These often involve the research credit, with "failures to participate in, or substantiate, qualified research activities and/or satisfy the requirements related to qualified research expenses," the IRS noted.

16. Improper monetized installment sales: In this promoted scheme, taxpayers defer recognition of gain upon the sale of appreciated property via an installment note that may provide for payments of interest only, with recognition of gain being improperly deferred until the payment of principal at the end of the term.

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