On April 5, 2023, the Internal Revenue Service (IRS) published the 12 top tax scams for 2023. The IRS and its Security Summit partners highlight the scams for taxpayers to be on the lookout for fraudsters. The fraudsters attempt to steal money, personal information and your personal data when engaging in the scams.
IRS Commissioner Danny Werfel stated, "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."
1. Employee Retention Credit (ERC) Scam — Aggressive scammers have been blasting ads on radio and the internet claiming refunds are available for Employee Retention Credits. The ERC benefits are limited to specific individuals and businesses. Many of the scammers are simply attempting to collect personally identifiable information and will use it to conduct identity theft.
2. Phishing and Smishing — Fake communications through email (phishing) or text (smishing) are a frequent strategy. In the communication, the scammer claims to represent a legitimate tax or financial organization. He or she lures unsuspecting victims into providing personal and financial information for the purpose of identity theft. The IRS emphasizes that it generally initiates contacts through regular mail, never through texting or email.
3. Online Accounts Help — Swindlers claim to be a "helpful" third party and offer assistance to create an IRS Online Account at IRS.gov
. The third parties are offering the help in an attempt to steal personal information and commit identity theft.
4. False Fuel Tax Credits — There is a fuel tax credit that was created to exclude agricultural vehicles and construction equipment from the highway fuel tax. However, scammers prepare returns and erroneously claim the credit using IRS Form 4136, Credit for Federal Tax Paid on Fuels.
5. Fake Charities — Fictitious charities are a common problem. After a natural disaster, scammers create fake organizations to take advantage of generous individuals. The scammer absconds with the gifts and the donor does not receive a deduction because the fake charity is not a qualified tax-exempt organization.
6. Unscrupulous Tax Return Preparers — Most tax preparers are excellent professionals providing a high-quality service. However, taxpayers should be cautious of preparers who charge a fee based on the size of the refund and may be unwilling to sign the return. A qualified preparer is required to include his or her IRS Preparer Tax Identification Number (PTIN) on the return.
7. Social Media Fraud — Social media can be a source of information, but also may be inaccurate or misleading. Scammers use social media to advocate various methods for filing false forms, such as IRS Form W-2 or IRS Form 8944. The IRS emphasizes that IRS Form 8944 is applicable to a very limited group, excluding them from some filing requirements.
8. Spear-phishing and Cybersecurity for Tax Professionals — Scammers are focused on CPAs and other tax preparers through the use of spear-phishing and cybersecurity focused schemes. Spear-phishing includes a series of emails or text messages that are intended to build a relationship with the tax preparer. After the relationship has been created, the scammer sends an email with a link that loads malware on the network of the professional. The malware allows access to client information and enables the filing of fraudulent tax returns.
9. Offer in Compromise Mills — The IRS has an important program called the Offer in Compromise (OIC) plan. This is a method that helps some individuals with payment plans or other ways to settle tax debts. The Offer in Compromise Mills frequently charge large payments up front for taxpayers who do not qualify for an OIC plan. Taxpayers should use the IRS Offer in Compromise Pre-Qualifier Tool on IRS.gov
to determine eligibility.
10. High-Income Filers — There are two popular strategies used for victims who have high incomes. A charitable remainder annuity trust (CRAT) is created and funded with appreciated property. The promoter wrongly claims there is a step up in basis. The trust assets are used to purchase a single premium immediate annuity (SPIA) and the scammer claims the payments will be tax-free. These plans fail to produce the promised tax-free income. A second plan is a monetized installment sale. The scammer claims that a high-income person with appreciated property can sell to a third party through an installment note. After 10 to 20 years of interest-only payments on the note, the capital gains tax will be due. These are abusive arrangements that may produce an IRS deficiency for back taxes, interest and large penalties.
11. Micro-Captive Insurance Plans — A micro-captive is an insurance company, which has made an election to be taxed on captive investment income only. However, many scammers have promoted schemes that are not a legitimate micro-captive insurance arrangement. The scheme may involve an implausible risk, ignore genuine business needs and duplicate existing coverage.
12. Syndicated Conservation Easements — Many taxpayers properly claim a charitable contribution deduction for the fair market value of a conservation easement. However, syndicated conservation easement promoters have frequently failed to comply with the laws and have improperly inflated the tax deductions.
If a taxpayer is the victim of a tax scheme, you can mail a completed IRS Form 14242, Report Suspected Abusive Tax Promotions or Preparers to the IRS Lead Development Center, Stop MS5040, 24000 Avila Road, Laguna Niguel, CA 92677-3405.
IRS announces $80 billion Inflation Reduction Act (IRA) Plan
On April 6, 2023, the long-awaited spending plan from the Internal Revenue Service (IRS) was released. Under the Inflation Reduction Act, the IRS was authorized an additional $80 billion of funding over the next decade to increase taxpayer service, improve enforcement and update technology.
Treasury Secretary Janet Yellen noted, "Thanks to Inflation Reduction Act resources, the IRS is already delivering significantly improved customer service this filing season. The Strategic Operating Plan (SOP) shows how the IRS will continue this transformation by providing world-class service, upgrading decades-old technology, and reducing the tax gap by ensuring high earners play by the same rules as working and middle-class families."
The three principal goals of the plan are to improve customer service, update technology and increase the level of enforcement.
1. Improved Customer Service — The SOP promises that the IRS "will help taxpayers get it right." There is a 10-year plan to permit taxpayers to securely file all documents and respond to notices online. By the end of Fiscal Year 2025, taxpayers and their tax advisors will be able to view and securely download their entire account history. Finally, the IRS claims it will be able to help taxpayers identify potential mistakes prior to filing.
2. Updated Technology — The IRS has been criticized for computer data systems that are decades-old. The IRS plans to install modern data platforms that allow quicker transactions and real-time processing. The updated technology is promised to eliminate paper backlogs and allow taxpayers to download current account data. It also will comply with the enhanced cybersecurity standards needed to protect all taxpayers.
3. Increased Enforcement — The IRS notes the number of audits of high-income taxpayers and large corporations has dramatically decreased over the past decade. The tax gap for the top 1% has expanded to approximately $160 billion per year. In that same timeframe, the audit rates for millionaires declined by 77%, the rates for large corporations decreased by 44% and rates for partnership audits declined by 80%.
The audits for high-income individuals take an average of 250 hours, rather than 5 hours for the typical taxpayer. Similarly, corporate audits may take hundreds of hours and lasts two to four years. The IRS must hire experienced accountants and attorneys with the new funds to increase the number of audits. There also will be improved analytics that identify potential tax evasion by high-income individuals and large corporations.
IRS Commissioner Werfel was pleased with the new plan. He explained the plan has five specific objectives. These are to dramatically improve services to help taxpayers meet their obligations, quickly resolve taxpayer issues when they arise, focus expanded enforcement on taxpayers with complex tax returns, deliver cutting-edge technology and analytics and build a highly skilled, diverse workforce.
The National Taxpayers Union Foundation issued a press release with the claim there were insufficient numbers of specific details. The press release stated, "The Plan unfortunately lacks key details that are critical to taxpayers and their advocates, such as specific quantitative goals for improved service, how the IRS will better measure and assess the tax gap, and how the IRS will square its expanded enforcement objectives with taxpayer rights and due process."
Controlled Substance Church Not Exempt
In Iowaska Church of Healing v. United States et al.
; No. 1:21-cv-02475 (2023), the U.S. District Court for the District of Columbia denied tax-exempt status to a church that was created to practice the Sacrament of Ayahuasca.
Iowaska Church is an Iowa nonprofit religious corporation that offers "the public access to spiritual growth, development and healing through the sacred Sacrament of Ayahuasca." This is a tea that contains dimethyltryptamine (DMT) and is a Schedule I drug under the Controlled Substances Act (CSA).
The nonprofit claims it is permitted to use Ayahuasca under a Supreme Court decision, Gonzales v. O Centro Espirita Beneficente Uniao do Vegetal
, 546 U.S. 418, 439 (2006) (O Centro
Iowaska Church applied for a CSA exemption with the Drug Enforcement Administration (DEA) in 2019, but that application is still pending.
The Iowaska Church conducts weekly ceremonies that involve prayer, singing, music, reflections and readings from the Ayahuasca Manifesto and the Universal Laws of Respect. The attendees at the session must pay $333 per ceremony.
The IRS received an application for exempt status. After multiple requests for additional information, the IRS proposed an adverse determination letter because nonprofit's "primary purpose of conducting activities, utilizing Ayahuasca violates federal law." It also claimed the nonprofit was not organized or operated exclusively for exempt purposes.
The nonprofit claims that it is exempt, but the IRS counters that it is not "organized and operated exclusively" for religious purposes. It cannot meet that standard as long as it does not have a CSA exemption because the use of Ayahuasca is illegal under federal law.
The nonprofit's Articles of Incorporation statement it exists to promote the "Sacrament of Ayahuasca" fails the "organized for exempt purposes" test. Reg. 1.501(c)(3)-1(b)(1). It also fails the "operated exclusively for exempt purposes" test. The taxpayer claimed that there were multiple exempt purposes, but the principal purpose was weekend ceremonies offered at a cost of $333 per participant. Because a substantial part of Iowaska Church activities is not in furtherance of an exempt purpose, the nonprofit failed the "operated exclusively for exempt purposes" test.
The taxpayer claimed the O Centro
case permits the sacramental consumption of Ayahuasca in the "sincere and lawful exercise of one's religion." However, the O Centro
case did not create a blanket exception for use of Ayahuasca, but did permit organizations to seek a CSA exemption from the DEA.
Iowaska Church also claimed it qualified for exempt status under terms of the Religious Freedom Restoration Act (RFRA). However, standing under RFRA requires that the government agency involved in the suit be responsible for the "injury in fact" of the taxpayer. Because the IRS has no bearing on the decision by the DEA Administrator to issue an exemption under CSA, there is no standing. Whether the IRS would or would not grant tax-exempt status has no bearing on the decision of the DEA on the CSA exemption.
Because the taxpayer lacks standing under the RFRA and use of a controlled substance is not permitted as an exempt purpose under the organized and operated test for nonprofits, the exemption was denied.
Applicable Federal Rate of 5.0% for April — Rev. Rul. 2023-6; 2023-14 IRB 1 (15 March 2023)
The IRS has announced the Applicable Federal Rate (AFR) for April of 2023. The AFR under Section 7520 for the month of April is 5.0%. The rates for March of 4.4% or February of 4.6% 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.