In light of the winter storms earlier this year, Californians were given an extension by the IRS and Franchise Tax Board to file and pay their 2022 taxes. With the upcoming Oct. 16 deadline, it’s crucial to not only fulfill our obligation to the government but also to protect ourselves from tax scams that could harm our financial well-being.
Recently, the IRS released its annual Dirty Dozen list of tax scams to alert everyone of the ongoing threat posed by fraudsters. While the IRS website contains valuable information on these scams, here is a summary of the most relevant issues, warning signs to look out for, and practical steps to safeguard your family and finances.
Beware of scam services
You may have come across radio ads promising a significant refund through the Employee Retention Credit (ERC). The ERC is a refundable tax credit introduced during the COVID-19 pandemic to assist employers who continued paying employees despite a decline in gross receipts. However, the IRS warns that many ads misleadingly portray eligibility for this credit.
Here are some key warning signs of a scam: exorbitant upfront fees, claims of an “easy application process” and immediate eligibility determination, and requests for excessive personal and business information over the phone.
To protect yourself, carefully review the eligibility requirements for the ERC credit on the IRS website: irs.gov/newsroom/employee-retention-credit-eligibility-checklist-help-understanding-this-complex-credit. If you believe you may qualify for this credit or any other tax breaks/programs, consult with your accountant or tax professional, especially if you heard about it through social media or radio ads.
Beware of scam communications
Receiving unsolicited emails (phishing) or texts (smishing) from organizations claiming to be the IRS is a red flag. These communications typically request personal and financial information, such as bank account numbers or social security numbers. It’s important to note that the IRS and other tax agencies do not initiate contact via email or text.
To protect yourself, follow the IRS’s guidance: do not reply, open attachments, or click on any links. Files and links may contain malicious code that can infect your computer or mobile phone. Visit irs.gov/privacy-disclosure/report-phishing for instructions on how to report suspicious communication with the IRS. If you have already disclosed your personal information, go to irs.gov/identity-theft-central to learn what steps you can take.
Avoid third-party services that claim to assist with creating an IRS Online Account. You can establish your account directly at www.irs.gov/.
Beware of bad tax preparers
Be cautious if your tax preparer provides peculiar advice, such as suggesting you deduct expenses like business suits or Sunday dinners with your family. Additionally, watch out for preparers who charge fees based on your refund amount or refuse to e-file your return, insisting that you mail it without their signature.
To protect yourself, seek a second opinion if the advice seems too good to be true. Verify the identity and licensing of your tax preparer. The IRS maintains a directory at irs.treasury.gov/rpo/rpo.jsf, which also provides information about a preparer’s qualifications and their ability to represent you in case of an audit.
Beware of fake charities
Clicking on links on social media platforms, like Facebook, to support victims of natural disasters like fires or earthquakes, can be risky. It’s essential to ensure the legitimacy of such charities. An article by The New York Times in July 2022 revealed that 76 fake charities operating under the same post office box were approved by the IRS.
Signs of potential scams include charities with similar but slightly different names compared to reputable organizations. For example, The United Way of Ohio mentioned in the article was distinct from the legitimate United Way.
To protect yourself, donate to recognized charities and be cautious of name variations. Use resources like Charity Navigator to research charities before making donations.
Beware of tax schemes
The IRS’s Dirty Dozen list also includes various tax avoidance strategies, primarily targeting high-income taxpayers. These schemes encompass arrangements like captive insurance and offshore accounts, which are typically inaccessible to the average taxpayer.
While some strategies mentioned may be legitimate for tax savings, such as charitable remainder annuity trusts or conservation easements, there have been instances where these vehicles have been misused by advisors and clients to unlawfully reduce tax liabilities.
Interestingly, tax protestors were absent from this year’s list. These individuals often present what the IRS deems as “frivolous” arguments against the legality of federal income tax and its obligation.
Be cautious if someone claims that paying income tax is voluntary or that income tax laws are unconstitutional.
To protect yourself, stay alert and seek guidance from trusted tax professionals. If you encounter any suspicious activity, report it promptly.
By following these precautions, you are safeguarding yourself and your finances not only during tax season but also beyond. Best of luck with your filing!
Michelle C. Herting is a CPA, Accredited Business Valuator, and Accredited Estate Planner specializing in succession planning, business valuations, and trust settlements.
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