Beware the “Dirty Dozen:” Common Tax Scams to Avoid

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In 2020, the IRS released a “Dirty Dozen” of prevalent tax scams. Here’s what to watch out for!

The IRS regularly compiles a list of the “Dirty Dozen,” or the 12 most common scams that target taxpayers. This list is always changing and evolving, and some risks have been heightened because of the COVID-19 pandemic. It’s important to be aware of the latest threats to protect yourself from tax fraud or identity theft.

Here is the latest Dirty Dozen list from the IRS, followed by guidance on how you can avoid these schemes:

  1. Phishing
  2. Fake charities
  3. Threatening impersonator phone calls
  4. Social media scams
  5. Economic impact payments or refund theft
  6. Senior fraud
  7. Non-English-speaker scams
  8. Return preparers
  9. Offer-in-Compromise mills
  10. Fake payments with repayment demands
  11. Payroll/HR
  12. Ransomware

1. Phishing

Phishing is a tax scam that continues to be among the most common each year. Scammers send fake emails or create fake websites posing to be the IRS and asking for personal information. Remember that the IRS will never contact you over email about your taxes. And official government websites will always have a .gov address and be HTTPS secure.

2. Fake charities

Especially during a tumultuous year like 2020, scammers will often try to convince people that they’re a charity and ask for money. Be wary of any unsolicited communication you receive in an email, by phone or text, or on social media.

3. Threatening impersonator phone calls

Taxpayers may receive phone calls from criminals who claim to be from the IRS and emphasize the urgency of their request. They want to scare you into sending them your personal information or money. The IRS says that it will never make such demands or threats.

4. Social media scams

Unfortunately, social media platforms have involved a growing proportion of identity theft related to taxes or impersonation scams. Because attackers can see information about you on your profiles, like your friends’ and family members’ identities, they may try to impersonate your loved ones to trick you.

5. EIP or refund theft

Economic impact payments (EIPs) were distributed as part of the CARES Act in 2020, and criminals turned their attention to stealing these payments via identify theft or providing false addresses to the IRS. This scam is a way for attackers to take advantage of many already vulnerable or struggling individuals.

6. Senior fraud

Scammers have long targeted older Americans in their tax scams. Elder fraud is an ongoing issue where attackers take advantage of this population by getting them to respond to fake emails or phone calls with their personal information. In 2020, COVID-19-related scams were especially prevalent for seniors.

7. Non-English-speaker scams

Criminals regularly attack groups with limited English proficiency, and they often use demanding and threatening tactics to gain personal or financial information. Tactics may include threats of legal action if the taxpayer doesn’t return the phone call. These attacks are usually conducted over the phone and sometimes use a pre-recorded message.

8. Return preparers

Taxpayers may turn to a preparer to ensure their return is filed correctly. Unfortunately, there are some unscrupulous return preparers out there who gain access to sensitive data and exploit it. It’s vital that taxpayers always carefully vet the person or company they hire to ensure their legitimacy. 

9. Offer-in-Compromise mills

Watch out for Offers in Compromise, which are offers to taxpayers to reduce their tax bill or settle their tax debts. Some of these solicitations are legitimate, and the programs can help people. But dishonest companies will try to sell offers to individuals who don’t qualify in attempts to collect bigger fees from taxpayers who are already burdened by a lot of debt. The IRS says that in 2019, there were 54,000 Offers in Compromise submitted to the agency, but only 18,000 were accepted.

10. Fake payments with repayment demands

Another common scam happens when an attacker demands the repayment of a tax refund. Sometimes, the scammer will even file a fake tax return and have the refund deposited into the taxpayer’s bank account, only to call them posing as an IRS employee and demand that they return it.

11. Payroll and HR scams

Common HR scams are Business Email Compromise (BEC) or Business Email Spoofing (BES), where scammers steal tax information like Form W-2 data. These have been more common with COVID-19 work-from-home requirements. Criminals will often request wire transfers, use false IRS documents, or create fake invoices.

12. Ransomware

Ransomware is a form of malware (invasive software) that infiltrates a computer, network, or server. Ransomware will gather personal information or sensitive data once it’s inside the network. Companies and taxpayers can prevent this from happening by using a multi-factor authentication method on devices and networks as extra protection when logging in.

Working with a qualified tax expert can help you avoid scams

Tax scams happen all the time, and you need to be prepared. Always watch out for unsolicited messages and phone calls, and be wary anytime someone says they’re an IRS employee and they make any demands or threats. 

Working with a credible tax professional can help you avoid these scams. The team at Provident CPA & Business Advisors is ready to help you understand your taxes this year and help you safely file a return. Contact us to get started!

Is There a “Right” Tax-Advantaged Retirement Plan?

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There’s no one perfect way to approach retirement that is the best for everyone. Choosing the right plan for you starts with understanding your options and the tax implications of each one.

There are several different approaches you can take to your retirement savings strategy. Each avenue has its own set of tax implications and benefits. And without a thorough look at what’s out there, you’ll never know whether you’re choosing the option that meets all your needs and sets you up for optimal tax minimization. 

Let’s dive deeper into:

  • The most common retirement plan options and their tax implications
  • How to make the right choice for your situation

Retirement plan options

Traditional 401(k) or 403(b)

These retirement accounts are very common and have benefits for both employees and employers. In many cases, an employer matches the employee’s monthly contributions and receives tax breaks on those contributions. 

The most significant difference between a 401(k) and a 403(b) is that nonprofit organizations use the latter. Otherwise, they generally have the same pros and cons. 

Some employers offer both Traditional and Roth 401(k) plans. A Traditional account provides tax savings now since contributions are made pre-tax. In contrast, the Roth allows investors to avoid taxes when they’re in retirement, as the contributions have already been taxed.

The contribution limit for a 401(k) is $19,500 annually, and $26,000 if you’re over 50.

Defined benefit plans

The aforementioned 401(k) plan is considered a defined contribution plan. Defined benefit plans, also known as pensions, are retirement accounts where only the employer makes contributions. 

Workers with a pension know in advance how to calculate the benefits they’ll receive in retirement, whereas defined contribution plans are dependent upon investment returns. Pensions don’t give the recipient any control, and they usually have to meet vesting requirements, but they are not responsible for making contributions. 

Solo 401(k)

A good option for a small business owner or self-employed worker with zero employees is the Solo 401(k) plan. You can contribute up to $57,000 or 100% of your income, whichever is less. Just like an employer-sponsored 401(k), contributions are made pre-tax, so you see the tax benefits now, rather than later.

Although you can’t have employees with a 401(k), you can hire your spouse for your business, and they can also contribute to the plan.

Traditional and Roth IRAs

A payroll-deduction IRA is often offered to employees when an employer doesn’t offer a retirement plan. Only employees make contributions to these accounts. But individuals can also set up IRAs either in addition to their employer plans or if self-employed. 

The two types of IRAs to know about are Traditional and Roth IRAs:

  • Traditional IRA: You contribute pre-tax dollars, so you pay taxes in retirement but defer them for now. These are best for individuals who expect to be in a similar or lower tax bracket in retirement.
  • Roth IRA: You pay tax now on contributions, so withdrawals are tax-free. This is a good option if you think you’ll be in a higher tax bracket when you start withdrawing, thus avoiding that higher tax rate.

Both of these types of IRAs have a maximum annual contribution limit of $6,000, or $7,000 if you’re over 50.

SEP IRA

A Simplified Employee Pension (SEP) plan is a good plan for small business owners, either with no employees or just a few. You can contribute $57,000 or up to 25% of compensation, whichever is less, and you can deduct contributions on your tax return. But as with a traditional IRA, income you receive in retirement is taxed.

SIMPLE IRA

These IRAs are best for owners of larger businesses with 100 or fewer employees. You can contribute up to $13,500, plus a catch-up contribution of $3,000 if you’re 50 or older. Total contributions for this plan and an employer plan, if applicable, have a limit of $19,500.

SIMPLE IRA contributions are tax-deductible, and account holders pay tax on the income in retirement. If an employer makes contributions to employee SIMPLE IRAs, those are deductible as a business expense.

Choosing the right option for you

Now that you know the basics about these common plans, how do you make the right choice? Here are a few pertinent questions to think about:

  • Are you likely to be in the same or lower tax bracket when you retire? Higher? A Roth retirement account allows you to pay taxes now, so if you’re in a lower bracket now and expect to be pushed to a higher one later, this may be a good option.
  • Are you self-employed? How big is your business? Do you have any employees or plan to?
  • How much do you want to save each year for retirement? Each has its own limits. 
  • Does your employer offer a retirement plan? This will determine how many options you have.

Identifying your priorities will help you weigh each retirement account’s pros and cons and find the plan that gives you the right balance of tax benefits and savings.

Working with tax professionals

When you need assistance selecting the right tax-advantaged strategy, work with the experts who can run the numbers for you. The team at Provident CPA & Business Advisors will help you plan for a more prosperous future and explain all tax implications of the different options available to you. 

Contact us today to get started.