Have you heard about the enormous tax savings you can reap by investing in a Maltese individual retirement arrangement or utilizing Puerto Rican captive insurance for your business? Before you invest your hard-earned money in these or other highly promoted tax schemes, you should check the IRS Dirty Dozen list.

For over 20 years, the IRS has issued an annual Dirty Dozen list identifying tax scams and avoidance schemes. This year’s list includes everything from employee retention credit claims to the use of fake charities.

Some items on the Dirty Dozen list involve fraud, such as identity theft through “spearphishing.” Other items involve tax credits or deductions, such as conservation easements, that can be legitimate but have been prone to abuse by taxpayers in the IRS’s view. 

The Dirty Dozen gives you red flags that trigger IRS scrutiny and can result in aggressive enforcement action against taxpayers who claim such deductions or credits and those who promote them.

When you see a new item on the Dirty Dozen list, especially if it’s at the top, you know it’s something the IRS is particularly interested in. A case in point is the employee retention credit (ERC). It didn’t make it to the list until 2023, and then the IRS placed it at the top. 

The top position tells you that combating fraudulent ERC claims is a high priority for the IRS. This doesn’t mean you shouldn’t claim the ERC if you’re entitled to it. Just make sure you have all the necessary records in case of an audit.

As part of its Dirty Dozen awareness effort, the IRS encourages members of the public to report individuals who promote improper and abusive tax schemes as well as tax return preparers who deliberately prepare improper returns. The IRS also created an Office of Promoter Investigations in 2021 to identify and stop promoters and enablers of abusive tax avoidance transactions.

Employing a strategy or scheme on the Dirty Dozen list makes an audit more likely. It can also result in substantial tax penalties if an audit occurs and the IRS concludes that taxes were underpaid due to the use of the strategy. The strategy being on the Dirty Dozen list can make it difficult to avoid the penalties the IRS can impose on

• taxpayers,
• tax preparers, and 
• promoters.

Taxpayers can avoid the accuracy-related penalty if they establish that they had reasonable cause for the underpayment and acted in good faith. But it is challenging, if not impossible, for taxpayers to demonstrate that they acted in good faith when they adopt a strategy or scheme listed in the IRS’s Dirty Dozen.