Navigating the IRS’s Dirty Dozen: Protecting The Enterprise From Tax Scams

As Ben Franklin once said, nothing in life is certain except for death and taxes.

And add to that a new pressing issue for businesses: the increasing prevalence of tax scams, particularly those involving fraudulent claims for tax credits.

As a recent alert issued by the U.S. Internal Revenue Service (IRS) highlights, these scams have unfortunately become more common, especially as new tax credits emerge. Businesses, both large and small, are vulnerable to falling victim to these schemes, often without even realizing it.

“This is a type of fraud where the scammers are encouraging taxpayers to take credits that they’re not actually eligible for, so that the scammer can collect higher tax preparer fees from the taxpayer,” Wendy Walker, VP of Regulatory Affairs at Sovos, told PYMNTS. “The more forms and schedules that they create for a taxpayer, the higher the fees they can charge.”

Per the IRS, the majority of these scams are related to tax credits like the fuel tax credit and the sick and family leave credit. These credits are often misrepresented by scammers who promise significant refunds, luring businesses into filing fraudulent claims, leading to costly consequences for the businesses involved.

“These are scams that have made the IRS’s Dirty Dozen list, which is a list that represents the worst of the worst scams,” Walker said. “And the IRS compiles that list annually. They distribute it throughout the summer leading into the next tax season.”

Understanding the Threat: IRS’s Dirty Dozen List

Scammers often target these specific credits due to their complexity and the general lack of expertise surrounding new tax legislation.

“Anytime that there is something new in the tax law, there aren’t a lot of people who are really experts which makes it easier to mislead taxpayers through false advertising and tactics like spreading it on social media,” Walker said.

The fuel tax credit, intended primarily for off-highway businesses and farms, has become a popular target for scammers. They prepare Form 4136 for taxpayers who do not qualify, charging them fees for their services while the taxpayer unknowingly submits a fraudulent claim.

Similarly, the sick and family leave credit, a relic from the COVID-19 pandemic, has been misrepresented as a “self-employment credit” on social media. Scammers convince businesses that they qualify for this credit when they do not, leading to fraudulent filings.

The IRS’s outdated systems also contribute to the persistence of these scams. While the agency is working on modernizing its fraud detection capabilities, the current state of its systems makes it challenging to be as proactive as necessary in combating these scams.

Protecting Your Business: Steps to Take

To avoid falling victim to these scams, businesses must be vigilant. Filing a fraudulent tax return, even unwittingly, can have severe repercussions.

If a taxpayer reduces their tax liability by claiming a fraudulent credit, Walker said, they will owe the taxes that were not paid, plus penalties and interest. In cases where the IRS determines that the taxpayer knowingly filed a fraudulent claim, the penalties can be even more severe, potentially leading to litigation.

“Be careful who you take advice from,” advised Walker, stressing that businesses should ensure that their tax preparers are reputable and thoroughly vetted, especially when switching to a new preparer. Relying on advertisements, social media or even politicians for tax advice can lead to serious pitfalls.

Businesses should also familiarize themselves with the IRS’s Dirty Dozen list, Walker stressed, noting that it provides detailed information on common scams and red flags. This knowledge can be a valuable tool in identifying and avoiding fraudulent schemes.

Still, the IRS does offer grace periods and voluntary disclosure programs, allowing taxpayers to amend their returns and avoid penalties. This is particularly relevant in the case of the Employer Retention Credit (ERC) claims, where fraud was so widespread that the IRS temporarily halted processing claims.

Walker stressed the importance of being suspicious of any preparer who encourages claiming credits that have been flagged by the IRS or widely advertised on TV or social media. Additionally, promises of large refunds should raise immediate concerns as they are one of the most telling red flags when dealing with tax preparers.

Walker also offered a crucial piece of advice: never sign a blank tax return. “You need to carefully inspect your tax return before it’s filed. You have them walk you through it, and you need to make sure you understand why credits and deductions are or are not included,” she said.

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