What Are the Dirty Dozen Tax Scams?

The Internal Revenue Service (IRS) annually releases a “Dirty Dozen” list to alert taxpayers about the most common scams. This campaign highlights fraudulent activities that can lead to financial loss and identity theft. While specific schemes evolve with technology, many are recurring threats that reappear in new forms. The list serves as a reminder for taxpayers to remain cautious, particularly during the tax filing season when these activities increase.

Scams Targeting Individual Taxpayers

Phishing and smishing are scams where criminals send fraudulent emails and text messages pretending to be from the IRS. These messages are designed to trick recipients into providing sensitive personal and financial information. A smishing text might falsely claim “Your account has now been put on hold” or mention an “Unusual Activity Report,” providing a malicious link. Clicking these links can install malware on a person’s device, giving scammers access to private data or locking the system with ransomware.

Threatening phone calls from IRS impersonators are another common attack. Scammers use intimidating language to create a sense of urgency, threatening arrest or license revocation if a supposed tax debt is not paid immediately. They often manipulate caller ID to appear as if they are the IRS and may demand payment via wire transfers or gift cards.

Following natural disasters, scammers often establish fake charities to exploit the public’s generosity. These organizations solicit donations but are fronts to steal money and personal information. To be eligible for a tax deduction, donations must be made to a qualified tax-exempt organization. Taxpayers can verify a charity’s legitimacy using the IRS’s Tax-Exempt Organization Search tool on its website.

Offer in Compromise (OIC) mills are businesses that market their ability to settle a person’s tax debt with the IRS for a fraction of the amount owed. These companies charge substantial fees for their services, making misleading promises of “pennies on the dollar” settlements that most taxpayers will not qualify for. While the OIC program is a legitimate option for some taxpayers, these mills often take money without providing any resolution.

Scams Involving Tax Preparation and Filing

Some tax return preparers, known as “ghost preparers,” engage in fraud. They prepare tax returns for a fee but refuse to sign the return as the paid preparer, which is a legal requirement. By not signing, they can direct refunds to their own bank accounts, charge inflated fees, or file fraudulent returns without being easily traced. The taxpayer is left to deal with the consequences of an inaccurate return.

Falsely padding deductions is a scheme used to illegally lower tax liability. This involves inflating the value of deductions, like charitable contributions, or claiming deductions for which the taxpayer is not entitled. For example, a preparer might invent or exaggerate business expenses to generate a larger refund. Taxpayers are legally responsible for the accuracy of their own returns, even if someone else prepares them.

Claiming fraudulent tax credits is another tactic promoted by scammers promising large refunds. For instance, individuals have been wrongly encouraged to claim the Fuel Tax Credit, which is restricted to off-highway business and farming use. The Employee Retention Credit (ERC), a pandemic-era relief provision, has also been a target for promoters. Due to widespread fraudulent claims, the IRS implemented a moratorium on processing new ERC claims to protect taxpayers from schemes that can result in improper payments that must be repaid.

Frivolous tax arguments are unreasonable and unfounded claims used to support not paying taxes. These arguments, such as asserting that wages are not income, have been consistently rejected by courts and have no basis in law. Individuals who file a return based on these arguments can face a $5,000 penalty. If a taxpayer makes frivolous arguments in U.S. Tax Court, the court can impose a separate penalty of up to $25,000.

High-Level and Abusive Tax Schemes

Abusive syndicated conservation easements are complex transactions for tax avoidance. Promoters acquire land, obtain an inflated appraisal of its development value, and sell shares to investors. The investors then donate an easement—an agreement not to develop the land—and claim a charitable deduction based on the inflated value. The IRS actively challenges these transactions, often disallowing the deduction and imposing penalties.

Abusive micro-captive insurance arrangements involve a taxpayer creating their own small insurance company. The taxpayer’s business pays premiums to this captive company, which are then deducted as business expenses. In abusive schemes, the coverage is for implausible risks, premiums are excessive, and funds are not managed like a genuine insurance company. This allows the owner to improperly deduct personal expenses or transfer wealth.

Improper monetized installment sales are a sophisticated scheme designed to defer the recognition of taxable gain on the sale of an asset. In this transaction, a seller enters into a contract to sell an asset to an intermediary for an installment note. The intermediary then sells the asset to the buyer for cash, and a lender provides a loan to the original seller. Promoters argue this allows the seller to receive cash immediately while deferring the tax gain, a position the IRS disputes.

How the IRS Initiates Contact

The Internal Revenue Service’s primary and initial method of contacting a taxpayer about a tax matter is through physical mail delivered by the U.S. Postal Service. Taxpayers should be highly skeptical of any communication claiming to be from the IRS that does not begin with an official letter. The IRS does not initiate contact with taxpayers by email, text message, or social media to request personal or financial information.

There are limited circumstances under which the IRS might make direct contact through a phone call or an in-person visit. An IRS revenue officer might visit a home or business, but this typically occurs only after multiple notices have been sent through the mail. A phone call may happen in the context of an ongoing audit or collection case, but it will not be the first contact.

Reporting Tax Scams and Fraud

For fraudulent emails and text messages, the IRS has established dedicated channels. Unsolicited emails designed to look like they are from the IRS should be forwarded directly to [email protected]. For fraudulent text messages (smishing), individuals should take a screenshot of the message and email it to the same address. Include the date, time, time zone, and the phone number that sent the message.

Phone scams or instances of individuals impersonating IRS agents should be reported to the Treasury Inspector General for Tax Administration (TIGTA). This can be done online through the TIGTA website or by calling their fraud hotline. TIGTA is the primary body responsible for overseeing IRS activities and protecting taxpayers from fraud involving IRS impersonation.

If a taxpayer suspects their tax return preparer has acted improperly, they should file Form 14157, Complaint: Tax Return Preparer. This form allows individuals to report misconduct such as a preparer not signing a return or altering documents without consent. Submitting this form helps the IRS identify and take action against fraudulent preparers.

For reporting other types of suspected tax fraud, such as an individual evading taxes or a business not complying with tax laws, use Form 3949-A, Information Referral. This form can be filled out and mailed to the IRS to provide information about the suspected fraudulent activity. The IRS uses these referrals to investigate potential non-compliance and enforce tax laws.