On the final weekend before taxes are due, the Internal Revenue Service (IRS) published two letters that caution taxpayers about the risks of tax advice found on social media and tax returns created by ghost preparers.

Millions of taxpayers regularly view various social media sites. However, the IRS explains that there are many inaccurate or misleading tax sources on social media. This misinformation can lead taxpayers into serious scams and trouble with the IRS.

IRS Commissioner Danny Werfel stated, "Social media is an easy way for scammers and others to try encouraging people to pursue some really bad ideas, and that includes ways to magically increase your tax refund. There are many ways to get good tax information, including [following] @irsnews on social media and from trusted tax professionals. But people should be careful with who they are following on social media for tax advice."

The IRS and Security Summit partners work together with state tax agencies to protect taxpayers. They highlight a number of fraudulent strategies that are recommended on the Internet.

1. Fraudulent Form W-2 — Taxpayers may be encouraged to use tax software to fill out false IRS Form W-2, Wage and Tax Statement such as a large income and withholding amount. Based on this false income and withholding, a taxpayer then files a fraudulent tax return and applies for a substantial refund.
2. False Form 7202 — IRS Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, allows taxpayers to receive credits during 2020 and 2021. These credits are not permitted in 2023.
3. Fraudulent Schedule H — Another scheme encourages taxpayers to file a false Schedule H (Form 1040), Household Employment Taxes. The taxpayer claims he or she paid sick or family medical leave wages and therefore qualifies for a refund.
4. Fraudulent Form 8944 — IRS Form 8944, Preparer e-file Hardship Waiver Request, is designed to be used by professional tax preparers. It allows the taxpayer to request a waiver to file a paper tax return, rather than an electronic return. This is not used by the typical taxpayer and cannot be used to avoid tax liability. If a taxpayer applies for a refund using this form, it is likely to lead to serious consequences including civil and criminal penalties.

The other problem that surfaces during tax season is a "ghost preparer." IRS Commissioner Danny Werfel noted, "Ghost preparers and other shady return preparers form a real threat every tax season to well-meaning taxpayers. By trying to make a fast buck, these scammers prey on seniors and underserved communities, enticing them with bigger refunds by including bogus tax credit claims or making up income or deductions. But after the tax return is filed, these ghost preparers disappear, leaving the taxpayer to deal with consequences ranging from a stolen refund to follow-up action from the IRS."

Qualified tax preparers are required to sign a return and include a valid preparer tax identification number (PTIN). Ghost preparers generally do not sign returns and follow other bad practices including shady fee practices, such as a cash-only payment with no receipt. The ghost preparer often will invent false income to try to increase tax credits or claim false deductions. Finally, it is a red flag if the preparer recommends sending the refund to another bank account rather than the taxpayer's bank account.

If you are aware of a ghost preparer, you can use IRS Form 14242, Report Suspected Abusive Tax Promotions or Preparers to alert the IRS.

Surge in Spearfishing Attacks on Tax Professionals

Each tax season, fraudsters develop new and creative strategies to target tax professionals. Identity thieves use various types of email attacks known as spearfishing. A popular method this tax season is the "new client" strategy. The cybercriminal claims he or she is a taxpayer who needs assistance with taxes. This may also occur after April 15 and the fraudster will claim he or she missed the tax deadline and must immediately file a return.

IRS Commissioner Danny Werfel stated, "It is crucial for tax professionals and businesses to be wary of creative and evolving cyberattacks designed to access sensitive systems. Cyberattacks pose a threat to not just the livelihood of the businesses, but the sensitive tax and personnel information that identity thieves can use to try filing fake tax returns." Werfel urges all tax preparers to be cautious opening emails, clicking on links or sharing private client information.

Spearfishing is an email that is designed to trick a tax preparer and create a data breach. Because the tax preparer generally has an extensive level of client tax information on his or her computers, the potential for harm is quite significant.

The "new client" scam is quite popular this tax season. A fraudster sends an email to a tax preparer and claims that it is urgent to file a current or overdue tax return. The fraudster may build a relationship with two or three emails to the professional. Finally, when the professional requests information, the fraudster sends an attachment that includes malware. The malware is designed to give the fraudster access to the computer of the tax preparer.

There are several methods to protect the tax preparer. First, do not click on any suspicious links or download attachments unless you are certain that this is from a known client. There have been cases where fraudsters hack the email accounts of individuals and then impersonate that individual in an email to the tax preparer. The tax preparer rarely recognizes that this email comes from a fraudster rather than his or her client.

If there is any doubt, it is helpful for the tax preparer to call the potential or existing client. The phone confirmation of the email will usually reveal whether it is a threat. It is best if tax professionals send password-protected or encrypted documents through emails. They should also use strong firewalls with protections against fraudsters.

The tax professional should watch for a suspicious request or unusual behavior. While emails from fraudsters quite often have poorly constructed sentences or unusual selection of words, a sophisticated fraudster may hack an email account and attempt to trick the tax professional by duplicating the language of a client.

If a tax professional receives a suspicious email, he or she can send it as an attachment to [email protected]. This report should also include the email address and phone number of the tax professional and the date and time of the email.

An abusive tax scheme may be reported using IRS Form 14242, Report Suspected Abusive Tax Promotions or Preparers. Another option is to mail a paper report to Internal Revenue Service Lead Development Center, Stop MS5040, 24000 Avila Road, Laguna Niguel, CA 92677-3405.

Potential "Badges of Fraud" on Conservation Easement Deduction

In North Donald LA Property LLC et al. v. Commissioner; No. 24703-21, the Tax Court ruled that there was a potential for a civil fraud penalty and the case would be tried on September 9, 2024.

NDLA is a Missouri limited liability company (LLC). North Donald LA Investors, LLC (NDLA) is the tax matters partner. The conservation easement was created through the efforts of Sixty West LLC (Sixty West), and Welsh LLC (Welsh). Sixty West purchased a large tract in Jefferson, Davis, Parish of Louisiana on March 23, 2016 for $2,975 per acre.

A 260.5-acre parcel was subsequently transferred to NDLA. On December 28, 2017, NDLA deeded a conservation easement to Atlantic Coast Conservancy, a qualified Section 170(h)(3) nonprofit. NDLA obtained an appraisal by Claude Clarke III. Subtracting an "after value" of $912,000, Mr. Clark determined that the charitable easement deduction was $115,391,000.

NDLA filed IRS Form 8283, Non-Cash Charitable Contributions, which noted the adjusted basis on the parcel was $804,232, and reported a deduction of $115,391,000. It also filed IRS Form 8886, Reportable Transaction Disclosure Statement for 2017.

The IRS denied the deduction and asserted penalties, including a 75% civil fraud penalty. NDLA requested a Tax Court ruling that stated there could be no civil fraud penalty.

Fraud is a question of fact and requires an intent to evade tax believed to be owed. Fraudulent intent is generally established by circumstantial evidence. The "badges of fraud" include but are not limited to: understating income, inadequate records, implausible or inconsistent explanations, concealing income or assets, failing to cooperate, illegal activities, incomplete or misleading information on a tax return, false testimony, false documents, failing to file returns and dealing extensively in cash.

The petitioner noted the 75% civil fraud penalty was held not applicable in Mill Road 36 Henry, LLC v. Commissioner, T.C. Memo. 2023-19 (2023) and claimed it also should be excluded in this case. In Mill Road, the Tax Court determined there was not sufficient evidence of the taxpayer intent to deceive the IRS.

The key question on appraisal fraud is whether a taxpayer "had knowledge of facts that would cause a reasonable person to expect the appraiser falsely to overstate the value of the donated property."

This and the other various "badges of fraud" are useful to determine whether there was an intent to mislead. The taxpayer claimed civil fraud could not apply because all relevant facts were disclosed. However, multiple badges of fraud in this case suggest taxpayers could be subject to the civil fraud penalty.

The IRS notes that 94% of the charitable deductions were allocated to individuals that were not investors during 2017. There were documents with "effective dates" that appear to be backdated. If the documents were backdated, individuals who were not actually members in 2017 claimed the deductions. In addition, the initial investors were entitled to a contribution-to-investment ratio of 4.67 to 1, and the second group of investors received a contribution-to-investment ratio of 15 to 1. These ratios were not disclosed on Form 8886, but rather there was a statement that the "transaction created a deduction greater than a 2.5 to 1 ratio."

The alleged backdating was also indicated because participants were told to stop using DocuSign to avoid the automatic dating of the documents. The instructions to the appraiser were given during an airplane ride, rather than in writing. In addition, appraiser Clark had agreed prior to the appraisal that he would appraise the property based on a hypothetical mining claim. The IRS claimed it had information two trucking companies signed fraudulent documents that represented there was a market demand for the mined product.

Finally, there were arms-length appraisals with values of $2,800 to $3,097 per acre. However, the Clark appraisal valued the property at over $400,000 per acre. The higher number could be deemed implausible. Therefore, the IRS may be able to show at trial that the appraisal was a false document and there was sufficient evidence of fraudulent intent. The Motion for Partial Summary Judgment was denied.

Editor's Note: The Clark appraisal claimed the property appreciated by over 1,500% in a 20-month period. The ruling on this motion is a thorough description of the required elements to prove intent. Intent to commit fraud is always a difficult element to approve. This is a very cogent summary of the required elements for proof of fraudulent intent.

Applicable Federal Rate of 5.2% for April; 2024-14 IRB 1 (15 March 2024)

The IRS has announced the Applicable Federal Rate (AFR) for April of 2024. The AFR under Sec. 7520 for the month of April is 5.2%. The rates for March of 5.0% or February of 4.8% 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 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, "No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property."