IRS Dirty Dozen

Ben (00:08):

Welcome back to the Retirement Tax Podcast. I’m your humble co-host, as always, Benjamin Brand, and joining me on The Least Boring Tax podcast. As always, this is Stephen Jarvis. Steven, how are you doing today, Ben?

Steven (00:20):

I’m doing really good. The sun’s out. We’re having fun. Let’s talk taxes.

Ben (00:23):

Yeah. July 4th is going to be later this week. I can’t wait to do the same thing that I’ve done every year since I was 12 and try to remove my fingers with cheap homemade explosives.

Steven (00:33):

Yeah, so far you’re still at 10 though, right? You got all those fingers still?

Ben (00:36):

10 fingers and 10 toes. Yeah. Got ’em all. I remember when I was a kid and working at the car wash and delivering pizzas, I earned significantly more money now, but I’m significantly less likely to waste money on fireworks. Back when I was a kid, I couldn’t earn enough money and I couldn’t spend enough money and I’d blow it all on fireworks. It’s funny how things change as you get older. 

Steven (00:54):

If we could go back, thankfully, it was mostly cash when I was a teenager and there’s no digital records of how much money I spent on fireworks. It would be an obscene amount.

Ben (01:02):

Thank goodness they didn’t have those instant preapproval credit cards at the fireworks stand. I’d still be paying that off.

Steven (01:06):

In the spirit of the fun of things we do in America who are going to do our annual take on the IRS’s Dirty Dozen, which is the report they put out every year of the most prolific scams related to taxes or the tax adjacent, which then as we were getting ready for the show, I think this is probably the third time we’ve done this. We’re almost, September will be three full years into this podcast. Yeah, three full years, and so I think this is our third round of doing this dirty dozen.

Ben (01:33):

Yeah. That’s interesting. Yeah, so it might be maybe someday to go back and look at what are really common threads for the Dirty Dozen and what are new cropping up things, and I think about three years ago, that’s 22, 23, 24, I imagine crypto has popped in and out. We did our spring client meetings a while back. We talked about scams. There are always new scams. AI probably there’s AI washing was something the SEC was talking about recently, so it’d be an interesting little time capsule to look back and see what remains consistent every year and the dirty dozen and what changes. 

Steven (02:05):

Part of the reason we do this, this is kind of just our annual reminder that we all really have to stay vigilant. The number of people out there trying to weasel our money away from us isn’t going down. The ways they’re doing it is getting more sophisticated, and so as much as we comment negatively on the IRS at times, I really do appreciate that they take the time to put this out and have these reminders for us of, Hey, let’s make sure we’re staying aware of what’s going on out there.

Ben (02:26):

Yeah. One thing I marveled at when we were in our client spring meetings, and part of that was the theme was risk management, but part of that was talking about scams. I always marvel at how clever some of these scams are and that if a person would use that cleverness, if you could call that a superpower for good, that you could actually change the world for the better rather than just trying to scam people out of money using what is apparent. Some pretty good smarts, but so let’s hear what the IRS has for as the dirty dozen for 2024.

Steven (02:55):

So certainly one of those things that’s a consistent theme every year is the idea of phishing, which also gets referred to as smishing, which is SMS or text message scams. The general idea behind this is when you’re getting electronic communications that have some kind of link or something else that nefarious actors are trying to get you to click on so they can take control of things. So really the most important reminders here are don’t click on links or attachments that you weren’t expecting. The IRS is not going to email you or text you and ask for your social security number or your bank account number, any electronic messages again that you weren’t expecting or even if you were expecting them that create an unnecessary or unreasonable sense of urgency. Those are things to watch out. Those are red flags, people asking you to get any kind of prepaid debit card or gift card. The IRS does not accept payment and prepaid cards. These are all things to really be on the lookout for to make sure, because unfortunately, Ben, it happens real fast. You click on one link and we’re in a bit of trouble.

Ben (03:56):

Yeah, I’m sure, Steven, you’ve heard the term trust, but verify. We’re doing don’t trust but verify. So you get something that’s edit from the IRS and it’s like, yeah, there’s a problem. Call this 1800 number. Don’t call that number. Verify yourself. Don’t trust but verify Google what is a good phone number for the IRS and do it that way because again, these scammers are using their cleverness for evil, so they can fake IRS emails. They can fake IRS phone calls. They can fake IRS paper correspondence where they say, we need to verify some information. Please call this number. And then it routes you to some scammer in some faraway land. So you want to don’t trust, but also verify.

Steven (04:36):

Tell me if you agree with this or not. But I remind my clients all the time that I will gladly take that phone call or that email from them if they want to verify, because sometimes we get hesitant. I don’t want to inconvenience bin by asking ’em if this thing is fraudulent or not. I’ll take that every time. I would much rather you give me three extra emails or two extra phone calls so that we can make sure that we’re really doing this the right way for my clients- call me every time.

Ben (04:59):

Yep. That was our lesson. So we covered IRS scams and Medicare scams, and we said, when in doubt, push it to us because one, we deal with this all the time, so we’re probably somewhat familiar with what the latest and greatest scam is, and two, it’s so much easier for us to say, yeah, that looks legitimate, or No, it’s not. Versus fixing the thing after the fact because we’ve had clients with identity stolen before and we have to change bank accounts and our clients are retired, so we’re sending them money every month, change that. Sometimes we have to cancel all the bank accounts entirely and send paper checks for a while. It can be a giant mess. So whether you’re a client of ours or Stevens or you have an advisor in a CPA, I think I can speak for every advisor in CPA when I say send them the thing and ask if it’s legitimate because that’s always going to be easier than cleaning up whatever possible scam might be on the other end of that.

Steven (05:50):

Yeah, absolutely. On the topic of professionals you might work with, this is also a consistent theme on The Dirty Dozen is watching for unscrupulous tax preparers. Unfortunately, even though you and I talk about CPAs all the time or enrolled agents, EAs, there actually is a very, very low bar to entry to technically be a professional tax preparer, and so this is kind of so many things. It’s a bit of a spectrum. You have the people who probably aren’t qualified it, maybe they mean well, but they just aren’t doing a good job. But then you have legitimate scams that go on where people are asking for payment upfront and they’re not ever doing the work that people are using it to steal your identity. And so a couple of red flags we want to look out for, even though a designation is not required and this area, it’s a good thing to be on the lookout for of is someone on that team professionally licensed.

(06:37):

Do they have a CPA designation? Do they have an EA designation? Another one that’s really common for less than trustworthy tax professionals is that they’re unwilling to put their name on the tax return. If you are working with another professional on your tax return, their name should absolutely go next to yours. There is no reason they shouldn’t be signing that return other than they’re either scamming you or they don’t want to be associated with whatever they’ve told you to file. So if someone is unwilling to put their name on their turn next to yours, that’s a red flag. Maybe it’s time to find someone new or to not work with that person.

Ben (07:11):

Yeah. I’ve seen ads, and this is probably a red flag, not something specific I don’t think, to the dirty dozen, but I forget, is it called like an ERC mill where they’re specifically leading with, we can go back and find you tax savings on this leftover thing from the pandemic, and then of course when the IRS catches up to that, in fact, didn’t the IRS I think stopped taking applications for something like this? But if there’s a specific sales pitch around something, I see that as being a bit of a red flag, but what do you think?

Steven (07:39):

Well, so that’s absolutely on the Dirty Dozen, the ERC, the employee retention credit, which you’re absolutely right. The IRS has shut that program down. It came out of covid. It was for employers, so it might not be super relevant to all of our listeners, but the concept is because it comes up with other things as well where someone, and that’s how the IRS refers to ’em as these mills where a group will say, Hey, we can go and push through these tax returns and get these big refunds. And really what they’re relying on is the IRS taking a long time to notice they’re doing something they shouldn’t.

Ben (08:06):

So this is the financial equivalent of your financial advisor has his office in the back of a moving van and the engine’s running?

Steven (08:13):

Yes, exactly. In fact, one of the ones that was new this year that I don’t spend a lot of time on social media, I hadn’t seen this one personally, but the IRS on the Dirty Dozen, they have a specific one about taking advice from social media and what a bad idea it is, and one of the examples they gave of popular trend going around social media is giving people instructions on basically how to file fraudulent W2s because the IRS’s system is a bit clunky and a bit slow moving, and so some ingenious scammer out there realize that you could apply for a refund that you don’t actually legitimately have a claim for, but a lot of times the iris will send it and it’ll be years later before they realize they shouldn’t have sent it. And so you can probably go find these social media videos where they’re giving you in directions on how to claim these huge refunds that you aren’t actually entitled to. And so kind of to your point, if there’s a sales pitch involved or anything that feels too good to be true, let’s go ahead and avoid those things because if we’re taking it to this extreme, and I’m sure none of our listeners would go down that route of I’m going to commit tax fraud, but that’s what that is. If you intentionally submit a tax return you know is wrong, that’s tax fraud, and now you’ve basically just indefinitely opened the window of how long the IRS can go back and audit your tax returns.

Ben (09:31):

Interesting. So fraud, if it’s outright fraud, there’s no statute of limitations where we can hold our breath for five or seven years and it goes away. It always makes me laugh when I see things that I think are fraudulent. Social media is great for this, so you’re committing fraud. You’re being a criminal. Shouldn’t the first rule of being a criminal be don’t record yourself committing a crime and post on the internet for everyone to see? 

Steven (09:52):

So is what’s so fascinating to me about social media because I a hundred percent agree with you, that should be the rule, but a lot of these things will come with, oh, well, this is for entertainment. This is not specific tax advice. Oh, I didn’t do that myself. I was just telling other people it was just a joke. Then you’ve got to find somebody who’s going to go and prosecute them and chase these people down. Again, we could go down a whole other rabbit hole of how hard it is to prosecute and convict people for financial crimes like this.

Ben (10:17):

Oh, yeah, and especially when we’re talking insurance, we’re talking taxes here, but with insurance, insurance is regulated statewide, and some states just don’t have much of a budget for it. So there’s certain states where insurance salesmen are making some pretty outlandish claims on social media. It’s completely illegal as far as I can tell, but there’s no enforcement body just because there isn’t. So yeah, you just got to be very careful what you consume online.

Steven (10:39):

The other one, the IRS specifically lists on the Dirty Dozen, and I don’t think I’ve mentioned it yet, but you can just go out to irs.gov/newsroom or go to Google and type IRS, dirty Dozen, and you’ll find the whole list. But related to mills, this kind of pops on and off of the list are what are called Offer and Compromise mills. And so an offer and compromise is a program under the IRS when you have a large amount of outstanding taxes, and again, it’s a legitimate program, but you’ll have these bad actors out there who use it. They use it really to prey on people who are in unfortunate situations, and they’ll make these outlandish claims about how we can make your tax bill go to zero. If you owe the IRS $300,000, we’re going to make it all go away, all these different things, and they’ll make all these claims about what they can do for you. And there are legitimate people out there who help with those situations, and you want to work with someone who’s qualified if you end up in that situation. But again, if it sounds too good to be true, let’s make sure we understand not just what the rules are, but I always want to understand how the person who’s pitching this to me is going to get compensated off of this because that can be an indication of are we on the same team here or are you trying to make a buck off of me?

Ben (11:49):

Yeah. Are your incentives aligned in the financial planning world when there are credit repair or things like that behind the curtain? This takes me way back to my financial piece University, my day of Ramsey teaching days, but some of these credit repair companies, you’re making your minimum payments on all these credit cards and your eyeballs and debt, and how some of these companies fix it is they have you stop paying your payments altogether and then you pay this company in the meantime, your credit score goes down and down and down because you’re delinquent on all these debts and the company you owe the money to thinks, well, this person is on the brink of bankruptcy. They haven’t paid us in months. Their credit score is terrible, and this credit resolution company will say, Hey, I know our client owes you $25,000, we’ve got $1,600, let’s settle. And so technically your debt is discharged. They did it in a somewhat not totally above board way, but is that similar to how I can’t imagine doing that with the IRS? That seems incredibly scary, but is that how something that would work?

Steven (12:45):

I haven’t gone through the offer and compromised process myself because that is a very specialty area of tax resolution. But yeah, it’s kind of this game of chicken with the IRS. In fact, to second the IRS’s comments about not following advice on social media, I do a lot of posting on LinkedIn around taxes, and I had someone recently share that they’re familiar with this group of CPAs who will very intentionally work with their clients to not pay their taxes at all for years at a time and then try to go through this offering compromise or a similar procedure to then settle for something less. So they’re intentionally, in my mind, they’re committing tax fraud. They’re intentionally not paying their taxes for years at a time, hoping that when the IRS finally notices they can settle for something less than what they owe.

Ben (13:27):

That’s terrifying.

Steven (13:29):

It is. This is one of those situations where the professionals who’s helping them do that, I would be willing to venture a bet is not putting their name on that tax return, and then these things kind of go in cycles. You mentioned the ERC, the employee retention credit before where that came out of covid and the IRS hadn’t really done a lot about it until now, and now their indications, they’re ramping up their enforcement efforts. So something that people are getting away with for years, the IRS is now going to come and kind of drop the hammer and it goes in waves like this. And so if you’re relying on, let’s hope the IRS doesn’t notice, that’s a dangerous game to play and as a good friend of ours, Micah Shilanski likes to say, play stupid games, win stupid prizes.

Ben (14:05):

Yeah, that’s a great saying. Yeah. Gosh, yeah, there’s definitely a line between tax planning and tax fraud. Sometimes I’ll joke with clients if they want to explore a tax strategy, I’ll say, I’d like our next meeting to not be between plated glass, so let’s try to keep this above board.

Steven (14:20):

So another one I guess indirectly was on the IRS’s Dirty dozen list. There’s usually something around this topic of being wary of charitable giving and not charitable giving across the board. We’re huge fans of that. We talk about it on the podcast all the time. You should absolutely find tax-efficient ways to support the organizations you care about where the IRS is coming from, really two places. One is just fraudulent charities that aren’t real nonprofits or aren’t really registered with the IRS. They don’t qualify as a charity with the IRS that use these marketing campaigns to try to drum up money that they aren’t really using for valid purposes. So again, in general, let’s stick to supporting causes we care about and are familiar with and know about. But then the other side of that, which I actually, we certainly had someone reach out to me to pitch this idea and it was another professional.

(15:06):

I tried to be very respectful, but as they’re describing it to me, all I could think was, this sounds technically legal, but it’s going to blow up at some point because the general idea behind it, just so our listeners have an idea of red flags to look out for, the general idea behind it was, Hey, we’ve got this company that has this situation that just gives us the ability to take advantage of legitimate tax rules where if you give us $50,000, we’re going to get you $250,000 of tax deductions through charitable giving, and then it kind of went from there. And so anytime, especially a new idea comes across my desk, there’s a couple of questions I’m going to ask, one of which I alluded to earlier, which is help me understand how someone’s making money from this, because someone’s always going to be making money from, and that’s fine.

(15:53):

I want professionals to get paid, but I want it to be clear how they’re getting paid. And I got this very vague answer of, it’s included in the $50,000 investment. If you don’t want me to know how or how much you’re getting paid, that’s a huge red flag for me. So that’s one. And then I always ask the question of, okay, how does this go wrong? Because especially when we’re taking advantage of some of the tax planning strategies that are outside the mainstream, we’ve got to understand if there’s an opportunity for me to invest $50,000 and get a $250,000 deduction, why wouldn’t I do that every day of the year? There’s got to be something I’m missing here, especially since they’re willing to tell me about it without signing a non-disclosure, without getting an investment upfront. They’re just openly telling me about this. And so as we went through it, it’s okay, sounded technically legal, but we’re relying on valuations that the IRS could come back and challenge later. And so it’s okay, I want to understand how this can go wrong or when, and you talked about this before, who’s actually gone through this. So tell me about a client who’s gotten questioned by the IRS and won. That’s what I want to know. If it’s a new or different strategy.

Ben (17:01):

If it sounds too good to be true, it probably is. And in the investing world, you’ll hear investment pitches all the time where we’ll earn 1% compounded per month or we’ll earn 40% per year. And I kind of think, well, gosh, if you could do that within a short amount of time, you’d be the most popular investment manager on the planet and a short amount of time after that, you’d have every cent of conceivable wealth on earth because just that’s how compounding works. Kind of like a Ponzi scheme. Eventually, you run out of people or you run out of other people’s money. So if it sounds too good, it probably is. And why haven’t I heard of to you up to this point? Because like you say, Steven, if I could put in 50 and get out 250, everybody with 50 would do that, so it doesn’t pass the smell test. So in that instance, I’m going to want to forward that to a professional and say, is this something we should be taking advantage of? And we get those kind of emails all the time. At the very least, we’re going to answer it on the show, but we’ll probably counsel the client through that or we’ll learn something ourselves. Either way, we win.

Steven (18:00):

And I’m always open to learning new ideas. I tell people all the time, I don’t have all the answers. I want to learn about those new things and the tax code changes all the time. So new strategies do come along. I would just recommend we proceed with caution.

Ben (18:13):

Proceed with caution. I like it. Well, that’s what we’ve got prepared for you this week. IRS Dirty Dozen. I can’t wait to share the next dirty dozen with you, but until next time, don’t let the tax man hit you where the good Lord split you. We’ll see you next time.

Steven (disclaimer) (18:25):

Hi everyone. Quick reminder before you go. While Ben and I feel very strongly about the information we’re sharing on this podcast, it is for educational purposes only and should not be taken as specific tax, investment or legal advice. You need to make sure that you are working with a professional to evaluate how these concepts apply to your specific situation before you take action.