Beware of these IRS Dirty Dozen Tax Scams for 2021

Each year, the IRS Dirty Dozen Tax Scams are updated with the most common trends in IRS-related fraud and scams. Here is what to know this year.

It’s the tax man’s job to ensure that the government gets its legal share – but masquerading as the IRS has been and continues to be a problem for thousands of Americans caught in tax scams year by year. Each year, the IRS puts out an advisory to help taxpayers keep an eye out for the twelve most common and most effective scams, and the forms they might take on. This is called the IRS Dirty Dozen.

Not all of these are tax scams directly aimed at the average taxpayer. They include scams aimed at tax professionals, dubious or unscrupulous services, abusive arrangements, illegal or unprofessional deals, and other illegal or questionable activity that, at the very least, could lead to serious financial problems and identity theft, and at worst, may lead to criminal charges.

 

What are the IRS Dirty Dozen Tax Scams?

The Dirty Dozen change on a yearly or near yearly basis, and the IRS keeps track of the last few IRS Dirty Dozen tax scams to give taxpayers an idea of what direction the trends have been moving in, and what the future of tax scamming might look like.

Most of these scams revolve around promising taxpayers the impossible, or soliciting information in lieu of serving the IRS, either through threats or promises of tax credits. Let’s go over the most common IRS Dirty Dozen tax scams for 2021, and how to avoid them.

 

The New IRS Dirty Dozen

This year’s Dirty Dozen will be officially separated into four distinct categories, namely the:

      1. Pandemic-related scams”
      2. Personal information cons”
      3. Rues focused on unsuspecting victims”
      4. Schemes that persuade taxpayers into unscrupulous actions”

In total, the Dirty Dozen this year include:

– Economic impact payment theft:

The economic impact payment, or the stimulus check, was part of the coronavirus aid and recovery measures implemented by the government in 2020. The vast majority of these were paid out automatically by the IRS, usually via mail. They could have been stolen by intercepting mail or looting mailboxes, or through phishing scams aimed at getting into your bank account.

– Phishing scams aimed at tax pros:

While phishing (the use of official-looking emails or proxy sites to steal and harvest login data and sensitive information) is nothing new, an emerging trend in 2021 has been the use of phishing to scam tax professionals in particular. These phishing attempts may revolve around trying to get tax pros to verify Electronic Filing Identification Numbers.

– Impersonator calls:

Sometimes also known as vishing, this tax scam involves impersonating someone from the IRS in order to coerce information or even money through threats of tax liens and debt. Note that the IRS always notifies taxpayers of anything important through a letter and/or notice first and will only call if these notices go ignored. Even so, the IRS will NEVER request sensitive information over the phone. Hang up immediately if the caller is asking for info like your TIN or SSN, or if they request payment via suspicious methods like Google Play or iTunes gift cards.

– Social media scams:

These are examples of identity theft using social media info to trick friends and family into providing further information, as well as malware.

– Ransomware:

Ransomware has been an emerging trend in recent years, forcefully locking access to a computer until a ransom is paid and encrypting (and subsequently deleting) the data on the computer if the demands are not met. These attacks are generally aimed at financial and healthcare organizations.

– Fake charities:

These fake charities may attempt to solicit money for COVID-19 victims, only to disappear once enough people have been scammed to take notice.

– Senior fraud:

Scammers are targeting seniors and immigrants with poor English skills in particular, often via the phone, usually to get them to transfer money to a “friend” or “forgotten family member” in need.

– Offer-in-compromise mills:

An offer in compromise allows taxpayers with a significant tax debt to pay off less than they might owe, if very specific criteria are met. Offer in compromise mills market themselves with the promise that they can always get their clients off on an offer in compromise, only to take their money, run, and disappear, or do the bare minimum for an exorbitant fee.

– Dangerous tax preparation scams:

Tax preparers must be officially recognized and licensed by the IRS via a Preparer Tax Identification Number. Yet not everyone offering tax preparation services has a PTIN. This can be a scam in and of itself, as these unregistered tax preparers might be looking for a quick profit by demanding upfront payments or using fake deductions.

– Unemployment fraud:

These are schemes based on manipulating employers or banks in order to continue to claim benefits they aren’t entitled to.

– Improper claims of business credits:

Taxpayers may claim certain business credits, such as research-related credits, by qualifying for the credit. Claiming it without proper qualifications, however, can lead to trouble with the IRS, including penalties and tax debt.

– Micro-captive schemes:

A micro-captive scheme is based on captive insurance companies, wherein both the insurer and the insured have shared ownership of the company, specially created in cases where the insured did not want to lose out on the tax benefits of insurance when their specific circumstances and risks are not usually covered.

In captive insurance, the insured receives coverage in exchange for greater premiums. This rabbit hole goes further down, and can lead into abusive micro-captive insurance schemes where taxpayers are convinced into paying exorbitant premiums for what amounts to little to no real insurance.

 

Avoiding Tax Scams in 2021 and Beyond

It is always best to thoroughly exercise caution and be mindful of the IRS Dirty Dozen tax scams. If you aren’t sure that a message or call is really coming from the IRS, or if something sounds too good to be true, or if you’re just plain suspicious of a specific service, then do the reasonable thing: look into it. Call a reputable tax attorney for more information. Contact the IRS itself, ask if what you’ve witnessed is legitimate, and report it if it isn’t.

As a general rule of thumb, note that the IRS isn’t going to ask for personal information or important tax info over the phone or via email. These are almost always attempts at getting the information scammers need to pull off their schemes.

The IRS will either ask you to mail copies of certain documents to addresses that are very clearly an IRS field office (which you can easily verify), or they might ask you to fill certain information out online via their official website and portal, NOT through an email.

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Tax Avoidance vs Evasion: The Fine Line

Taxes can be difficult to understand and manage, and they are made even more confusing with the very fine line between tax avoidance vs. evasion.

There is a fine albeit significant line between tax avoidance and tax evasion – one allows you to save hundreds, if not thousands of dollars a year on taxes, while the other can land you in a jail cell.

Understanding the difference – and recognizing tax wrongdoing – is important for the education and safety of every American taxpayer. We all know that the IRS doesn’t joke around, and regardless of whether you’re faced with a litigious agent or hefty IRS penalties, getting on the bad side off the IRS is always an exceedingly bad idea.

 

What is Tax Avoidance?

Tax avoidance describes utilizing everything at your disposal as per the US and state tax code to minimize your tax burden and maximize your after-tax wealth. Tax avoidance is not illegal. This may include the use of loopholes, from simple ones to much more complicated ones, to reduce or eliminate taxes on certain gains and transactions.

Tax loopholes are not always mistakes or oversights left behind in the creation of tax law – sometimes, these loopholes are deliberately created to incentivize certain businesses and financial activities. In this case, “loophole” is a misnomer. These kinds of deliberate tax avoidance features are tax shields. There are ways for both businesses and individuals to reduce their tax burden without crossing the line into illegality.

 

What is Tax Evasion?

Tax evasion describes any means through which a taxpayer deliberately underpays or misrepresents their tax burden, to underpay. Therefore, tax evasion is illegal. Tax evasion schemes may include:

    1. Not reporting certain sources of income to the proper tax authorities (such as being paid under the table for weekend jobs)
    2. Misreporting personal and business expenses in order to write off more taxes
    3. Keeping business and personal transactions “off the books” deliberately
    4. Squirreling funds away in offshore accounts illegally

The main difference between a form of tax evasion vs avoidance is whether the action taken to reduce one’s tax burden is illegal. Any form of tax evasion tends to be explicitly illegal according to the tax code. Tax avoidance schemes make use of loopholes or deliberate lawmaker decisions to reduce one’s tax burden.

The intended end result – to pay less taxes – is always the same. What isn’t the same is how the IRS reacts, and what penalties you end up facing as a result of illegal tax activity.

 

When Is It Legal – Or Illegal?

Tax laws exist to help taxpayers differentiate between illegal and legal forms of reducing your tax burden. Furthermore, tax professionals serve clients by helping them differentiate between the illegal and legal, advise them on tax avoidance strategies, and help them avoid potential forms of tax evasion.

If you aren’t in the mood to get caught up with state tax problems, then working with local tax professionals is your best bet for finding useful tax avoidance tips without steering into illegal territory. Not all states share the same tax laws, and state taxes and federal taxes are levied under different rules and circumstances.

When it comes to federal tax law, the IRS goes through great lengths to educate taxpayers on how they can best prepare their tax returns. This includes the selection and qualification of select deductions. You can also work with a professional and qualified tax return preparer. The IRS encourages the use of qualified tax return preparers, and helps taxpayers stay away from potential scammers.

In other words, whether or not a specific form of tax avoidance is legal or illegal is not a question you should have to ask yourself. It’s a question you should be asking a qualified tax professional.

 

Common Examples of Tax Evasion

Tax evasion can come in many shapes and sizes. The most common forms of tax evasion include:

    • Underreporting income.
    • Not reporting certain transactions.
    • Not reporting the sale of cryptocurrencies.
    • Ignoring your overseas rental income and other sources of income.
    • Not reporting income from all-cash business.
    • Paying for services under the table.
    • Deliberately not filing a tax return.
    • Failure to withhold tax payments.
    • And more.

If you’re concerned about whether any of your tax habits might translate into tax evasion in the eyes of the IRS, contact a tax professional today.

 

Common Tax Loopholes and Tax Shields

Useful tax loopholes and tax shields include:

You may qualify for certain deductibles and credits, and not know it. Some deductibles are accessible to people with tuition costs, medical expenses, daycare costs, and more. Donating to charity also helps.

 

Penalties for Tax Evasion

The legal consequences for intentional tax evasion are severe. There are prison sentences and hefty fines. Tax evasion is a federal offense. Depending on where a person’s tax evasion crime lands in the set categories, they may face a prison sentence of anywhere from one to five years. Fines for tax evasion range from $100,000 per year, to a one-time payment of $250,000 depending on the crime.

Tax fraud and tax evasion are serious crimes. If you have found yourself charged with tax fraud, it’s critical that you seek out an experienced local criminal defense attorney.

On the other hand, if you’re facing a potential IRS audit and have not committed any form of tax fraud or tax evasion, however, you won’t need the help of a criminal defense attorney. In these cases, speak with a tax professional. The IRS can audit taxpayers randomly or because of basic mistakes and discrepancies. During an audit, it is unlikely to levy criminal charges unless the IRS finds evidence that you deliberately avoided your duty as a taxpayer.

 

Need Help with Your Taxes?

There is a difference between tax evasion vs avoidance. Trying to pay the government less than you owe is illegal. However, doing everything you can to reduce your tax burden is encouraged. If you want to find out how you might be able to reduce your tax burden both in life and in death, be sure to speak with our tax professionals at Rush Tax Resolution.

We can help through tax preparation services, tax consulting, and when you go toe-to-toe with the IRS, we offer legal representation to ensure that the IRS is treating you fairly as in accordance with the Taxpayer Bill of Rights. Contact us today for more information.

IRS Identity Protection PIN: Avoiding Tax Related Identity Theft

Taxpayers should understand the IRS Identity Protection PIN program and how it can help protect individuals from tax related identity theft.

The IRS Identity Protection PIN program is making the rounds in tax news for its brand-new nationwide availability, but it is far from a new program.

First developed a few years ago to protect victims of tax-related identity theft from further or ongoing tax fraud, it was eventually made available on a voluntary basis in specific states and is now available to taxpayers everywhere in the US, as of mid-January 2021.

 

What is an IRS Identity Protection PIN?

The purpose of the program is to attach an individualized 6-digit PIN (personal identification number) to your electronic and paper returns, as an additional layer of security to prevent tax-related identity theft and fraud. This PIN is only known to you and the IRS.

The IRS Identity Protection PIN program is currently entirely voluntary, and the IRS is working on an opt-out program for 2022. If a PIN is associated with your taxpayer account, then your electronic returns will be rejected if they don’t use the right PIN, and your paper returns will be given more scrutiny for potential fraud.

If you want to avoid delays or unnecessary hassles, the IRS recommends that you avail your Identity Protection PIN (IP PIN) now and keep it strictly confidential.

It’s meant to add an additional layer of security to your account and your tax information, and in lieu of that, the IRS clarifies that it will never call, text, or email you specifically to get your IP PIN. Any attempts to do so may be an identity theft scheme at work. Your PIN is only used to verify your identity when filing tax returns. 

 

When Will the IRS Identity Protection PIN Opt-In Program Begin?

It has already begun. Although the IRS Identity Protection PIN was available to victims of tax-related identity fraud in the past, it is now optionally available to all taxpayers in the US.

However, taxpayers must go through a rigorous screening procedure to verify and authenticate their identities in order to receive their IRS IP PIN.

All taxpayers are encouraged to do so through the IRS’ online tool first and use alternative methods only if they cannot successfully authenticate their identities online.

 

Getting an IRS IP PIN

To get your IRS Identity Protection PIN, you must visit the IRS’ official website and use their Get an IP PIN tool. The verification process requires that you have an IRS tax account verified through the Secure Access program, and the IRS will use the same program to authenticate your identity.

In order to verify your identity through the IRS’ online Secure Access registration program, you will need the following information at hand:

    • Your email address
    • Your tax identification number (TIN) or your Social Security Number (SSN)
    • At least one valid financial account number tied to your name and identity, such as:
        • Student loan account number (all lenders except Nelnet)
        • Mortgage account number
        • Home equity loan or line of credit account
        • Auto loan number
        • Credit card number (not debit, not American Express, no corporate cards)
        • Your mobile phone at hand (to receive a verification code via text). Note that you can opt to have a verification code sent via postal mail instead.

Naturally, you will also need a username and password. Be sure to keep these safe. If you have successfully verified your identity through the IRS, you will be shown your PIN online. Keep it somewhere safe or remember it.

Unlike before 2021, there is no longer a need to file a Form 14039 to get your IRS IP PIN (however, you must still file a Form 14039 if you have recently become a victim of tax-related identity theft).

If you cannot verify your identity online through Secure Access, you do have the option of filing for an IRS IP PIN through Form 15227. Be sure to mail the filled-out form to the IRS or send it to them per fax. This option is only available to taxpayers with an adjusted gross income of $72,000 or less.

If your gross income exceeds this amount, then you must contact the IRS through a local Taxpayer Assistance Center (call ahead to schedule an appointment) and bring two different valid photo IDs (for example, a passport and a driver’s license).

 

How Long Is an IRS IP PIN Valid?

The IRS IP PIN is only valid for the year in which it is issued. The IRS will issue the PIN at any point of the year except the period between November until mid-January of the next year. You cannot use this year’s PIN to authenticate yourself in tax returns starting mid-January 2022, for example.

If you have enrolled successfully in the IRS’ IP PIN program once, then you should automatically receive your IP PIN every year from now on through the recurring Notice CP01A. Former victims of tax-related identity theft should be automatically receiving their IRS IP PIN for the year.

Again, the IRS is working on an opt-out program to be made available in 2022, so taxpayers who choose not to further verify themselves can opt to ignore the PIN option.

 

Misusing or Forgetting Your IRS Identity Protection PIN

If you forgot your PIN, didn’t receive it in the mail, lost it, or didn’t receive/lost your Notice CP01A, you can redo the IRS’s online Get an IP PIN process and verify your identity through Secure Access to retrieve it. It will be the same PIN you were issued previously.

 

How IRS IP PINs Affect Your Returns Even If You Don’t Have One

If you file jointly with your IP PIN-verified spouse or have dependents who use an IP PIN (primary, secondary, and dependent taxpayers can each avail of their own IP PIN), then your tax return may be rejected if you haven’t included your spouse’s and/or dependent’s respective IP PINs. Keep in mind that the IRS requires joint tax returns to include the PINs of any taxpayers identified on said return.

 

How Rush Tax Resolutions Can Help You

If you have been the victim of tax-related identity theft, with or without an IP PIN, your first call should be to a tax professional. Tax-related identity theft is a serious crime, and a tax professional will be able to guide you on your next steps. If you’ve availed an IP PIN as a result of identity theft and didn’t receive one, contact Rush Tax Resolution’s professional tax services – we may be able to help.