Picture this scenario: you’re scrolling through your inbox when suddenly, an email catches your eye. It appears to be from a trustworthy source, offering an incredible tax deal that sounds like the perfect opportunity to save and even make some extra money. However, something seems off about it – could it be too good to be true? The answer is yes, this was the start of a tax scam that could put your finances and dental practice security at risk.
According to the Internal Revenue Service, in the fiscal year 2022, a total of 61,142 cases were reported to the U.S. Sentencing Commission, with 401 cases involving tax fraud. Even though tax fraud offenses have decreased by 22.4% since 2018, they still represent a considerable concern for the IRS and the government as a whole, and efforts to combat these crimes seem to be a priority in the coming years.
Considering the importance of this topic, in this blog post we’ll approach everything you need to know about tax scams and how to safeguard your dental practice against them.
What Actions Are Considered Tax Fraud?
Tax fraud goes beyond simple oversight; it involves a conscious attempt to avoid tax obligations. In simpler words, it occurs when someone intentionally and willfully tries to avoid paying taxes. Examples include failing to submit an income tax return or creating a fraudulent return. Committing tax fraud can result in serious consequences far beyond those of a simple error. To be more specific, not filing could result in a one-year imprisonment and a $100,000 penalty while trying to evade taxes could lead to a five-year imprisonment and a $250,000 fine.
How Does the IRS Identify Tax Fraud?
The IRS identifies tax fraud through various methods, including data analysis, reviewing inconsistencies in tax returns, conducting audits, and investigating tips and leads from informants. Additionally, they utilize advanced technology and tools to detect suspicious activities, such as artificial intelligence and machine learning algorithms to analyze large amounts of data for potential signs of fraudulent behavior.
According to the IRS, tax fraud involves knowingly submitting false statements or documents in connection with an application and/or return. To identify these frauds, investigators carefully examine a range of indicators to find the following signs:
- Hiding income
- Fake Social Security number
- Fake documents
- Intentional tax evasion
If there are no obvious signs of fraud, the IRS usually assumes that mistakes in your tax return are unintentional mistakes caused by negligence. Although this usually doesn’t result in criminal charges for tax fraud, inaccurate tax filings can result in a penalty of 20% of the amount owed. To avoid this penalty, it’s important to make sure that all the information you submit to the IRS is accurate and true. Besides, if you believe you have been falsely accused of tax fraud, you can seek legal help.
Tax Scams: A Year-Round Threats
Tax season may be the prime time for scammers to strike, but the reality is that these schemes can happen at any time of the year. The Internal Revenue Service (IRS) recently wrapped up its annual Dirty Dozen list of tax scams for 2023, reminding businesses to stay vigilant against fraudsters. We listed all of them, so you can stay informed and take necessary precautions to protect yourself and your business.
12 Tax Scams You Should Be Aware Of:
1. Employee Retention Credit Claims:
Taxpayers should be careful of scammers urging them to claim big refunds from the Employee Retention Credit (ERC). These promotions, disseminated through radio and internet ads, often give wrong information about who can participate and how to calculate things. They do this to get personal information from people to steal their identity.
2. Phishing and Smishing:
Scammers usually send fake messages pretending to be genuine organizations in the tax and financial industry, such as the IRS and state institutions. They send these messages to trick people into sharing personal and financial information, which can result in identity theft. The IRS usually contacts people by regular mail. They will never contact taxpayers through email, text, or social media about bills or tax refunds.
3. Online Account Help from Third-Party Scammers:
In this scam, scammers pretend to be a “helpful” intermediary and assist in setting up an IRS Online Account at IRS.gov. Never accept this, as you can find important tax information online. Don’t give your personal information to an unknown organization, and try to create your own online accounts on IRS.gov.
4. False Fuel Tax Credit Claims:
In this case, some tax preparers and promoters are tempting taxpayers to increase their refunds by making false claims for the credit. The IRS noticed more ads for claiming specific refundable credits with Form 4136, Credit for Federal Tax Paid on Fuels. It’s important to note that the fuel tax credit is for off-highway business and farming use and is not available to most taxpayers.
5. Fake Charities:
Fake charities are always a problem, especially during crises or natural disasters. Scammers create fake organizations to exploit people’s generosity, aiming to get money and personal information for identity theft. Always verify the legitimacy of charities before making donations. You can deduct donations to charitable organizations from your federal tax return, but only if the organization is recognized as tax-exempt by the IRS.
6. Unscrupulous Tax Return Preparers:
Be careful of suspicious tax professionals who charge a fee based on the size of your refund. A major red flag is when the tax preparer is unwilling to sign the tax return. Beware of “ghost” preparers who prepare tax returns but do not sign or include their IRS Preparer Tax Identification Number (PTIN). It’s against the law. Don’t sign a blank or incomplete return.
7. Social Media: Fraudulent Form Filing and Bad Advice:
You can find wrong tax information on social media, and there are a lot of examples. One includes popular tax forms like Form W-2 and Form 8944. This last one is meant for a specific group of people, but these schemes encourage individuals to provide false information to obtain a refund. The tip here is to be cautious of things that seem too good to be true.
8. Spearphishing and Cybersecurity for Tax Professionals:
Spearphishing is a specific phishing attack targeting an organization or business. In this case, the IRS is cautioning tax professionals because a data breach can cause more harm if the tax preparer is targeted. If a spearphishing attack succeeds, it can result in the theft of client data and the tax preparer’s identity.
9. Offer in Compromise Mills:
Offers in Compromise are a helpful program for people who are unable to pay their federal tax debts. Scammers can misleadingly promote Offers in Compromise to people who don’t qualify, often costing taxpayers thousands of dollars. If you’re in doubt, a taxpayer can check your eligibility for free using the IRS Offer in Compromise Pre-Qualifier tool.
10. Schemes Aimed at High-Income Filers:
You should be cautious of schemes involving Charitable Remainder Annuity Trusts, Monetized Installment Sales, and other tax avoidance strategies targeting high-income individuals. These schemes often promise significant tax benefits, but they can come with serious legal and financial consequences. It is essential to consult with a qualified tax professional before engaging in any complex tax planning strategies.
11. Bogus Tax Avoidance Strategies:
Some people use ways to avoid paying taxes, including what we call micro-captive insurance, where the owners decide to only pay taxes on the money their insurance company makes from investments. But here’s the catch – some people set up fake micro-captives that aren’t real insurance. They create pretend risks, don’t actually help businesses, and copy other types of insurance.
Another “trick” is with syndicated conservation easements. This involves limiting how you can use a piece of land to protect nature. Now, if you do this the right way, you might get a tax break for doing something good for the environment. But some people abuse this by exaggerating things, trying to get way more tax breaks than they should.
12. Schemes with International Elements:
The last type of scam listed by the IRS involves international elements. If you own offshore accounts and digital assets, you should be aware that the IRS is closely scrutinizing attempts to hide assets. Fraudulent schemes involving Maltese individual retirement arrangements and Puerto Rican captive insurance are under the IRS radar.
How to Avoid Tax Fraud
To avoid tax fraud, know who prepares your tax return. To choose a trustworthy tax preparer, you can follow these tips below:
- Check their Credentials: Verify your tax preparer’s credentials by using the IRS’s Directory of Federal Tax Return Preparers or searching for CPAs and tax experts using online tools. Also, ask for and verify references.
- Find an experienced preparer in your field: If your tax filings are complex, such as FBAR or FATCA filings, it’s important to work with a qualified accountant or attorney who can prepare a tax return that meets all your financial requirements. Before signing your return, make sure to carefully read it and ask any questions you may have.
- Act quickly: If the IRS tells you there are problems with your tax return, talk to your tax preparer right away. If a tax preparer causes you financial harm, you can complain to the IRS.
When tax season approaches, you know what to do. Be vigilant against scams that could compromise your finances and business security. By staying informed and reporting suspicious activities, you can safeguard your practice and integrity. Remember, a little caution today can prevent a significant headache tomorrow. To read more about management, check our blog today.
