The IRS’s dirty dozen – 2023 edition
September 15, 2023
Welcome to The Retirement Tax Podcast, where hosts Steven Jarvis, CPA, and Benjamin Brandt, CFP, work together to bridge the gap between tax professionals, financial advisors, and their mutual clients to help reduce most people’s largest expense in retirement: taxes. Each week, they will dive into conversations around taxes, focusing on what you can truly control (instead of what you cannot) and how to set yourself up financially for your future.
In this episode Steven and Ben are back to share the latest from the IRS on where they are seeing fraud and scams happen. Hopefully none of these apply to you but it’s always good to know what to be on the look out for so you can be one step ahead of the “bad guys”. Steven and Ben share their insight on which ones on the IRS’s list you should keep an eye on and how to make sure you keep yourself protected. Here is the dirty dozen 2023 edition.
What You’ll Learn In Today’s Episode:
Read The Transcript Below:
Hello everyone, and welcome to the next episode of the Retirement Tax Podcast, also known as the Least Boring Tax podcast because we can call it whatever we want. I am your host, Steven Jarvis, CPA, and with me the illustrious Benjamin Brandt. Ben, how are you?
I’m doing fantastic. I’m excited to cover this topic for our longest term listeners. They know that we’re circling back. The IRS publishes this list every year, so it’s always exciting to see what the bad guys are up to.
Yeah. So we’re going to talk today about the IRS’s Dirty Dozen. They make a list for us every year of the top scams and schemes they’re seeing that are tax related. But Ben, before we dive into that, and I’m still not sure how I feel about this, but in one of our last episodes, you gave me homework and I really feel like I need to come back and complete the assignment and close the loop on this.
Yeah, so last week I gave an impromptu session of stump the CPA and I won. I think this is the first time I’ve ever won because I had a question about inherited IRAs, and we can go back and listen to the audio, I think. But I think how the general question went down was, what happens if I have more than one inherited IRA? So mom leaves me an IRA and dad leaves me an IRA or mom leaves me two IRAs. How do I have to take distributions from those? Can I take all the distributions from one or do I have to match each distribution to each account based on the age of my parent at their death? So Steven went and did some homework and what did you find for us, Steven?
Yeah, so if you didn’t listen to that episode already, definitely go back and listen to it. There’s a lot of nuance in there as far as inherited IRAs go. But I did do my research because when you presented that question, Ben, I felt very confident that if we receive an IRA from mom and one from dad, that those are separate things. We would absolutely have to take an RMD from each. We couldn’t aggregate the two. I felt confident on that one, and I was correct on that. I did double check. But the one that stumped me was, well, what if I received two different IRAs from the same person? What if mom has two IRAs and leaves both of them to me? And that’s where I wasn’t as confident how this was going to be treated. So went and did my research, and as it turns out, which fits I guess loosely with other IRS logic, the IRS is looking at the names associated with the accounts, not necessarily the account numbers, which is how they look at it. For me as an individual, they don’t care how many IRAs I have and how many different accounts they’re going to look at Steven Jarvis and how many IRAs does Steven Jarvis have. And so if I receive two different inherited IRAs from my mom, the IRS is going to say, who did you receive them from? And I can actually aggregate those together when it comes to RMDs. And so I would only need to take an RMD from one of them in an amount sufficient to satisfy both of them if I wanted to go that route.
And so people might ask you, where would this really up in planning? Why would you only want to take a distribution from one and not the other? And it actually does come up in planning. So let’s say your mom had an IRA at the bank and that was in some CDs, and then she had an IRA at Fidelity, and that was invested in the stock market and we might be in the midst of a stock market correction. And so given the choice, you’d want to take the money out of those CDs or a savings account or fixed investments and let those stock market type investments recover. So I don’t think you’d want to go to the length of planning ahead for this where we have our bonds and our cash and our CDs in one IRA and then our equities in the other. I dunno if that juice is worth the squeeze, but it does come up occasionally in planning, and that’s how we approach it from a planning perspective. What has hurt the most? And let’s let that lick its wounds and recover. Let’s take the money from the other one.
And Ben, that’s why I love being able to have these conversations together. I do tend to focus very heavily on the tax side of, okay, how much is going to be due and how do we satisfy what the IRS wants from us? But this reinforces why the conversation is always bigger than just what the tax impact is. There’s other considerations there. So there you go.
That’s why this is the least boring tax podcast because we’re talking about the confluence of taxes and retirement planning.
So Ben, if you could print something out and put a big gold star at the top so I can hang it on my fridge that I did my homework and I got an A on it, that would be great.
No detention and extra recess.
Perfect. Alright, well let’s move past homework and dive into this year’s IRS Dirty Dozen. And if you’re looking, we will include it a link in the show notes. But you can go out to the IRS’s website. They publish this every year, and really it’s just a list of things to be on the lookout for as a taxpayer, as a consumer. Hopefully we’ll just make you give just a little bit of pause to say, okay, wait, is this valid or not?
Okay. So if you’ve been on social media at all and social media has any inclination whatsoever that you are a business owner or you own an LLC or anything like that, you’ve definitely received ads, maybe thousands, maybe hundreds of thousands for this exact thing. So this is employee retention credit scams or ERCs. And according to social media, every human on earth is going to completely remove any tax liability through ERCs. True or false, Steven?
It is true that those ads are constantly out there. It is false that it is remotely applicable to probably the majority of our listeners. The employee retention credits or ERCs came out of some of the covid bills is the variety of stimulus things that were done. It is a legitimate credit. There are a lot of businesses who benefited from it in the appropriate way, but we’re coming up on some of the deadlines for when this can even be applied for. And I think that’s why you’re seeing this kind of this mad dash, this pressure to push people into it. And the IRS is regularly coming out and highlighting this as a big problem area. They’re starting to do more audits around this. They’re realizing that there’s these ERC mills, these ERC factories, whatever you want to call ’em, are pressuring people into this credit when they don’t remotely qualify for it.
And so the scam part comes in where they’re selling some kind of a service tax prep service or consulting service. They’re charging you a fee based on how much money they’re going to save you potentially. And then when the rubber meets the road and the IRS comes calling, I’m guessing they’re not going to be able to be found. Is that a safe assumption?
Yeah, that’s certainly part of it. And then this is one of those where they include in the disclosures that, hey, we can’t guarantee the outcome and we’re just doing the best that we can. And even though they know going in that they’re being incredibly aggressive, and this is one of those areas where the tax prep software might let you do it, that doesn’t make it right. And so they’re going to be able to fill out the forms and help you submit it and okay, here’s your a hundred thousand dollars credit and so we’re going to charge you $10,000, whatever the charge is going to be. And then either it never gets approved or at some point the IRS goes back and reviews, it gets disallowed, and now you’ve already paid for this service. That out of the gate probably wasn’t actually applicable to you.
So I had to do some additional Googling when I was looking at this article earlier. So the second item here is phishing and Smishing. Are they making up words now? What the heck is Smishing? I know what phishing is. Phishing is when I get an email that looks like it’s from FedEx, but it’s not. They’re trying to get some information from me by impersonating someone else. I assume Smishing is something similar but slightly different.
Yeah, so I am familiar with this one. It’s related to text messages that are trying to accomplish the same thing. I think the name comes from text messages being referred to as SMS, which now I don’t remember that acronym stands for. But yes, the whole idea is that you’re receiving unsolicited messages that try to create this false sense of urgency or potentially that you’ve won something. They’re trying to get an emotional reaction from you so that you click on a link or send them personal information. So these, unfortunately, they’ve been around for decades now as long as the internet’s been around, but they keep getting more and more sophisticated. And the people who do these will target tax filing deadlines. They’ll target trending topics. And so as this episode comes out on September 15th, that’s the extended deadline for business returns. October 15th is the extended deadline for individual returns. And so usually right around these types of dates, we see an uptick of this that you are going to get some really urgent sounding message of, Hey, the IRS doesn’t agree with your tax return and you need to send your social security number to this number so that they can confirm that you’re really you, and let’s just avoid all of those.
Right? And the IRS, they’re going to mail you something physical in the mail, right? They’re not going to send you an email or a text message call.
They’re going to call you.
Yeah. Okay. I don’t know much about SMS messaging. All I know is that as an Android user, when I text message my iPhone friends, my bubble looks different and it drives ’em crazy.
Yeah, they’re the green and blue bubbles. So Ben, I’m going to skip down a couple because related to this, the IRS specifically calls out separately what they call spearphishing, phishing and cybersecurity issues for tax professionals. So I know our listeners are not tax professionals, but this is something to keep in mind, especially if you’re looking to work with a tax professional that these scammers aren’t just targeting consumers. They target the professionals as well. And this is something that we constantly work on from a training standpoint with our team at Retirement Tax Services. Thankfully, we’ve got a really great team and we can highlight this as a training opportunity. We don’t have to go in and correct things because we’ve got a good system in place. But I want to share a couple of the things we do with our team just so people are aware for themselves of what to be on the lookout for.
Because some of these emails, some of these messages are very convincing. They come from a domain that looks like it could be legitimate. They’ve got some information about you, so it feels like they know you. But some of the things that I’m always telling my team is that you don’t ever open attachments. You don’t ever click on links from someone you weren’t expecting to receive something from, and they get really clever. You want to make sure that when in doubt, delete the email is really what it comes down to. That’s what I tell my team all the time, that they’re never going to get in trouble for deleting an email they thought was suspicious. As long as they bring it up and we talk about ’em, they do a really great job. But those are things we want to be on the lookout for poor grammar in those messages. But really what it comes down to is, was I expecting a message from this email address?
That’s a great one. Was I expecting an email from this email address? Anything that is inflammatory or you feel like it’s made to incite some kind of an emotion from you? The IRS, they’re not going to try to scare you, I don’t think. I mean, getting a letter from the IRS is of course, probably in and itself intimidating, but the IRS, they don’t, I don’t want to say they don’t care. Maybe they don’t care, but they’re not trying to scare you into something in particular, especially not by email. And they’re probably not going to email you either, so…
They definitely are not going to email you.
Yeah. A lot to think about. Think about next one here. Online account help from third party scammers. So your friendly neighborhood scammer is posing as a helpful third party in order to help you create an online account or something from the IRS, but I’m guessing they’re not just being regular helpful, is that right?
No. You don’t want to be sharing your personal information with people you don’t have a direct professional relationship with. This is a good reminder though, that I think we’ve talked about on the show before that anybody, regardless of their age, can go and set up an account with the Social Security Administration, and you absolutely should if you haven’t already. I am nowhere close to claiming social security. I’ve already set up my account. Same with the IRS website through their ID-me system. There’s a couple of steps you have to go through to create your online account, but once it’s created, now it’s tied to you and someone can’t go create it on your behalf, the scammers can’t reach out to you and try to guilt you into having them help you set it up. So it really is a pretty quick process if you go to the IRS’s website to set up your own account. So definitely something I would encourage that people just do electively on their own.
The next item here, probably similar to the ERC credits, is false fuel tax credit claims. What can you tell us about that, Steven?
I kind of feel like the IRS had to dig deep this year to fill out their full dozen because the fuel tax credit, when I read through it, it’s like, I think I remember hearing about that once, but this is one I’ve never actually even dealt with. It applies to so few people. It’s this really nuanced credit for certain types of businesses and farms that are way off. The beaten track is basically what it comes down to. So almost guaranteed nobody listening to this is eligible for it. So if someone tells you they’re going to help you with fuel tax credits, just walk away, run away,
Run away. This next one here, we’re probably going to see a lot of that. Every time something tragic and terrible happens in the country, like these fires in Hawaii, fake charities pop up. So the IRS is specifically pointing out on their annual Dirty dozen list, watch out for fake charities.
Yeah, just because somebody claims to be a charity doesn’t mean you’re going to get a tax deduction for it, which Ben, you and I talk about this all the time, you want to give to charities because you care about the cause because you want to support a great organization, not because you’re looking for the tax benefit, but it can be frustrating to find out only after the fact you’re not going to get a tax benefit, which even this can also come up even with legitimate charitable efforts that aren’t qualified with the IRS. So when GoFundMe start popping up all over, just because someone says, I’m going to use this for charitable purposes, doesn’t automatically mean it’s going to qualify for a charitable deduction on your tax return.
That’s a good distinction that GoFundMe doesn’t or may or may not qualify.
May or may not. It’s not going to be automatic, but it’s just setting up a GoFundMe page does not mean that it’s a taxable deduction. They have to actually be registered with the IRS as a charity.
Okay. How about unscrupulous tax return preparers? Where are they getting some fraud snuck in there?
Yeah, so this one, as a tax professional myself, this one’s super frustrating for me. What often happens here is that you have underqualified or unlicensed tax professionals who are trying to make a quick buck and who are going to disappear as soon as something goes wrong. And so they might very well be able to help you file your tax return. But this is where we want to make sure that they’re registered with the IRS where possible that we’re getting a referral from someone else who’s worked with that tax professional. It is not necessarily that they’re just trying to scam you right out of the gate, but like any professional service, we want to make sure that we’re working with reputable people who are going to be there if questions come up or if something goes wrong.
And so are you looking for specific designations like CPA and EA? Is that what we’re looking for? To have some social proof?
Those are definitely the most common. So there’s a really low bar for actually being a paid tax preparer. You don’t have to be a CPA or an EA. You can get what’s called the preparer tax identification number or P10 from the IRS. So that would be the minimum starting point for me if you’re looking for someone to help you. The bigger thing that I, maybe a simpler thing that you can look for is you need to ask right out of the gate if the tax preparer is going to sign the return, if their name is going to go on the return. Because if you’re working with a tax professional, there is no reason for them to leave their name off of your tax return other than they’re trying to avoid liability. And so that’s a question I would ask for upfront. And then that’s something I would look for on the tax return before it gets filed, is the tax preparer’s name on there. Ben, I don’t know that you double check for it or not, but on all the clients we work on together, my name’s right there at the bottom of the tax return, it says Steven Jarvis says the name of the company, all of that, it’s got my P10 on there. You want to make sure that this is someone who’s partnering with you is going to be there alongside you.
I have noticed that and I appreciate it. So we’re kind of doubling up on some of these, but just to make sure that we add up to a dozen, we’ve got social media fraudulent form filling and bad advice. We kind of covered that. Spearfishing and cybersecurity for tax professionals. Of course, you’ve covered how you hedge for that in your team. Then we’ve got offer in Compromise Mills. This is something I’m not familiar with. What is an offer in Compromise Mill?
Yeah, so an offer in compromise is a specific arrangement with the IRS for people who have tax burdens that they are not financially able to meet. And so the reason you’re probably not familiar with this, Ben, is because you don’t skip paying your taxes for years at a time and then hope the IRS is going to forgive a bunch of your debt. So it is probably good that you’re not familiar with offering compromises. They are a completely legitimate tool for helping people who’ve gotten really far behind on their taxes. But similar to the employee retention credits that we talked about at the top, this is an area where scammers have found that they can pressure people into paying them for services that really aren’t going to accomplish what they’re promising. That you’ll have unscrupulous professionals that’ll come in and say, oh yeah, we’re going to get this reduced to near zero.
You just have to pay us this exorbitant fee that’s still so much less than the IRS is charging you right now. But then you get into it and reality just doesn’t match what was promised. And so unfortunately, this is a common issue the IRS has seen where taxpayers who, again, these people are preying on emotional situations where someone owes six figures to the IRS and they feel like they’re never going to be able to get out from under this. And so someone comes along and says, wait, don’t worry. I’ve got you. We do this all the time. I’m going to get that knocked down. It’s basically nothing. And here’s the fee you have to pay me, which is large, but significantly less than the tax bill. And this person who a minute ago thought they were drowning and never were going to come up for air, this is suddenly their chance at redemption. And they say, yep, great. Let me pay you instead of the IRS. And then when the dust settles, that offering compromise isn’t anywhere close to what they were told it would be.
So this the IRS version of the credit repair ads and things like that that you see advertised.
Yes. Same. Very good comparison.
Okay, so moving on. We’ve got the next one here is schemes aimed at high income filers. They specifically mentioned CRASS, which are charitable remainder annuity trusts, and then monetized installment sales. So if you have a high income or you’re having some kind of a liquidity event, these are scammers that are reaching out and saying, we’ve got some secret sauce that’s going to help you pay a little to no taxes on these big liquidity events or taxable situation events.
And for me, this kind of ties back into one we already talked about, just a little bit of some of the nonsense you see on social media at times of, again, these are valid strategies in certain situations if they’re done correctly. What we often see happens is that people are so excited to avoid taxes that this gets really carried away. And unfortunately, they can find professionals who will help them go along with this. And this ends up being more of a strategy of let’s help no one notices as opposed to we’ve actually done this correctly. And so yeah, charitable remainder annuity trusts and monetized installment sales. These are both, again, perfectly legitimate strategies in the right situations. And so for our listeners, what I would say is, one, if it sounds too good to be true, it probably is. And then two, we want to make sure we’re asking the questions.
And one of the questions I would ask, especially if it’s a new strategy you are not familiar with, is what’s going to happen in the unlikely event the IRS asks questions about this strategy just to see how that professional is going to react, because there are going to be areas that are subjective. It’s not likely the IRS is ever going to come and ask questions. But actually in our next episode, we’re going to talk about things that increase your audit risks. So be sure and come back for that. But we want to make sure, I always take the approach of, we call it the straight face test, that if the IRS ever asks about something I’ve done on a tax return, I want to be able to sit down with a straight face and explain my rationale and feel good about where I’m coming from.
And then that’s a seamless transition to the next one here. Bogus tax avoidance strategies. So if you spend any time at all on social media, especially TikTok, I’m not on TikTok, but that makes its way onto other social media. And I think some of the advice is remarkably bad. In fact, I think, Steven, I texted you last week one where a woman was recommending that you should bury a family member on your own property because then you can file with the IRS that you are a cemetery and thus never pay property tax. You don’t have to pay your mortgage anymore. And all sorts of amazing other things. If I haven’t sent you that one, I’ll definitely do that. But yeah, just because someone’s on social media and they have some kind of outlandish advice, don’t go do that. You’ve got to do your own due diligence because sometimes there’s crazy people on the internet. I don’t know if that’s news to anyone, but there’s no qualifications to spout off on the internet.
Yes. It’s quite sad. And then the last one on here, Ben, which is a good reminder, one that makes me laugh because I comment on this quite often, is avoiding tax schemes that have an international element. I tell people all the time, I’m not your guy for creating an account in the Cayman Islands. And we usually all get a good laugh about that because that’s what we hear about as if that was something that happened decades ago and no one does anymore. But there are still plenty of people out there who will try to help you dodge taxes by doing some convoluted things in other countries and so many bad ideas that fall under this. But one of the things I try to come back to for myself and that I recommend to other people is that if we are pursuing a strategy strictly because of taxes, we need to really take a second and make sure that this makes sense. Most of the time we want to start with what are the goals that we’re trying to accomplish, and then how do we do that tax efficiently? Trying to chase tax savings solely for the sake of tax savings is quite often we get ourselves in trouble.
That sounds great. Well, until next September when we have the next version of the IRS Dirty Dozen, can’t wait to see what the bad guys are up to. Appreciate your time today, Steven, and until next time, don’t let the tax man hit you where the good Lord split you.
Steven (Disclaimer) (21:55):
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.