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Sunday April 21, 2024

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2023 IRS Dirty Dozen - Part I

Each year, the IRS publishes the "Dirty Dozen" tax scams. This helpful list benefits taxpayers and tax professionals.

While tax scams tend to peak during tax-filing season, it is important to understand them. Scammers could take advantage of taxpayers at any time during the year.

IRS Commissioner Danny Werfel noted, "Scammers are coming up with new ways all the time to try to steal information from taxpayers. People should be wary and avoid sharing sensitive personal data over the phone, email or social media to avoid getting caught up in these scams. And people should always remember to be wary if a tax deal sounds too good to be true."

The 2023 Dirty Dozen includes a variety of new and creative scams. Below is the first half of the scam list. Next week's newsletter will cover the remaining half.
  1. Employee Retention Credit Scam — During the COVID-19 pandemic, Congress passed several incentives to encourage employers to retain their employees. One of these programs was a credit that could provide a substantial tax refund. It had the title Employee Retention Credit (ERC) and was designed to assist companies that had experienced a dramatic loss of business due to COVID-related lockdowns. However, ERC promoters attempted to deceive ineligible business owners to claim the credit. Many promoters used highly inaccurate information. Con artists will applied for credits for companies or businesses that did not have the required downturn and did not qualify. Some scammers also gathered data from businesses, failed to apply for the credit and then used the financial information for identity theft.
  2. Phishing and Smishing — Tax fraudsters have risen to new levels of creativity in email (phishing) and text (smishing) efforts. Email or text scams often impersonate the IRS, local law enforcement, a bank or financial institution. The fraudster attempts to lure a victim into sharing personal and financial information. This can then be used for identity theft. The IRS emphasizes that it initiates most contacts through regular mail and does not contact taxpayers by email, text or social media.
  3. Third-Party Scammer Help — A swindler will pose as a "helpful" third party. He or she offers to assist in creating an IRS online account at IRS.gov. In creating the online account, the helpful fraudster acquires personal and financial information from the taxpayer. This data can be used for identity theft. The IRS emphasizes that everyone can use IRS.gov to create his or her online account.
  4. Fuel Tax Credit Claims — Many businesses and farms use vehicles in fields or for construction purposes. Because these vehicles are not using the highways, there is a fuel tax credit available. The non-highway use qualifies the individual to receive a credit for the tax paid on gasoline and diesel fuel. However, tax fraudsters encourage taxpayers to claim an erroneous credit and inflate their refunds. There has been a dramatic increase in the number of false credits filed using IRS Form 4136, Credit for Federal Tax Paid on Fuels.
  5. Fake Charities — When there is a natural disaster (such as a pandemic), tax scammers often create fake charities. Good-hearted Americans respond to help those in need. However, donors should always use recognized and reputable charities for their gifts. The scammers create a fake charity with a name similar to a recognized nonprofit and then abscond with all of the gifts. The other problem for taxpayers is that a gift to a fake charity does not qualify for a charitable deduction. Only gifts to qualified tax-exempt charities qualify for a deduction.
  6. Ghost Tax Preparers — Most tax preparers are honest and capable individuals. However, there are some dishonest tax preparers who may claim they can increase the size of a refund. Anyone who charges a fee based on the amount of a refund is suspect. There are "ghost" preparers who prepare returns but typically refuse to sign the return or include an IRS Preparer Tax Identification Number (PTIN). This PTIN is required by law. Never sign a blank or incomplete tax return.
The IRS encourages individuals who suspect tax fraud to complete IRS Form 14242, Report Suspected Abusive Tax Promotions or Preparers. This can be sent to the Internal Revenue Service Lead Development Center, Stop MS5040, 24000 Avila Road, Laguna Niguel, CA 92677-3405.

Members of Congress Support IRS Direct File


On June 26, 2023, 99 Members of Congress sent a letter to IRS Commissioner Daniel Werfel and Deputy Secretary of the Treasury Adewale Adeyemo to encourage development of an e–Filing system.

The Members noted the IRS plans to pilot the Direct File tool in the 2024 filing season. They advocated for the creation of a "simple, free, and easy-to-use e-file tools to streamline Americans' access to the tax system."

On average, a taxpayer spends $140 and 8 hours filing their taxes each year. The IRS has provided a simple e-Filing service with the Free File program. However, even though 70% of taxpayers qualify for Free File, only 2% used the service in the 2022 tax year. The tax companies that have historically participated in the Free File program have not always followed the rules. One large company recently agreed to a $141 million payment to taxpayers who thought they were getting the Free File system but ended up paying for tax-preparation software.

The IRS is both a tax-raising entity and the country's second-largest benefits administrator. The IRS assists families each year with the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC).

In a recent survey, about 72% of taxpayers expressed interest in an IRS Direct File tool. Several taxpayers commented about the Direct File option. One stated, "If the government is requiring me to file, they should offer a free service." Another individual thought the IRS system would be able to protect personal data. The individual noted, "I don't think the IRS is going to sell [my personal data] off."

The letter notes that Commissioner Werfel stated, "the IRS is technically capable of delivering Direct File."

The Inflation Reduction Act (IRA) included additional funding for the development of the Direct File tool. The letter notes the IRS has stated a pilot Direct File program can be available within 18 months after passage of the IRA. This shows "the IRS can move nimbly and competently to serve American taxpayers."

The Members of Congress concluded, "We urge you to make this pilot of the direct file tool available to as many taxpayers as is feasible, in order to deliver real value quickly to American taxpayers and demonstrate the value of modernizing the IRS, while also gathering data to make improvements and to better serve American taxpayers."

Editor's Note: The development of a Direct File tool is supported by many members of Congress. However, this is a multi-year software project. The surveys showed that not only does the IRS need to develop the tool for federal taxes, but most Americans will not use it unless it also includes their state tax returns. Developing an income tax tool for 50 states is a major project.

ETAAC Opposes IRS Direct File


On June 28, 2023. The Electronic Tax Administration Advisory Committee (ETAAC) released its annual report. IRS Commissioner Daniel Werfel noted, "ETAAC plays a critical role for our nation's tax system and taxpayers. Members bring a wide range of perspectives on critical issues ranging from electronic filing and online services to identity theft and other security issues."

ETAAC expressed concern about the proposed IRS Direct File option. A member of ETAAC, Andrew Phillips, noted there are "considerable financial costs associated with developing and releasing" a Direct File service. The IRS estimates that the program would cost between $64 and $249 million annually.

In a public meeting to present to the annual ETAAC report, Phillips noted the extra funding could be used better in other programs. He stated, "The IRS, like any other public or private organization, must constantly prioritize and reprioritize and make tough decisions on where to invest their time and money to ensure they are making the most efficient use of their limited resources."

ETAAC recommends the IRS spend the funds to raise awareness of the existing Free File program through marketing campaigns. If the IRS does proceed with a Direct File pilot, the new program should match the security standards met by the Free File Alliance members.

The Free File program was launched in 2002. The ETAAC argues that expanding the Free File program would allow "taxpayers to file their state return using any Free File program enhances the user experience, reduces unintentional state noncompliance and improves tax return processing at the IRS and state levels."

The IRS has not yet stated whether it will attempt to include state tax returns with the Direct File option. Because less than 3 million taxpayers of the 104 million eligible used the Free File program in 2022, many Members of Congress believe a Direct File option is appropriate.

Editor's Note: Many nations in Europe send a pre-populated tax return to individuals. The taxpayer can review and file most returns in 5 minutes. The taxpayer only needs to agree that the calculated tax payments are correct. If the taxpayer in Europe desires to file a complete return, he or she can proceed to obtain advice from a qualified tax preparer. However, the vast majority of taxpayers review and accept the pre-populated government forms. If this method were adopted in the U.S., it would greatly reduce the tax filing costs individuals. However, because the U.S. tax system is generally more complex than most European systems, there still would be many individuals who use a qualified tax preparer.

Applicable Federal Rate of 4.6% for July -- Rev. Rul. 2023-12; 2023-27 IRB 1 (15 June 2023)


The IRS has announced the Applicable Federal Rate (AFR) for July of 2023. The AFR under Sec. 7520 for the month of July is 4.6%. The rates for June of 4.2% or May of 4.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.

Published June 30, 2023

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