The IRS annually adjusts over 60 tax provisions for inflation to prevent “bracket creep,” where inflation, not income growth, pushes taxpayers into higher brackets or reduces deductions. Since 2018, the IRS has used the Chained Consumer Price Index (C-CPI) for more accurate adjustments. For tax year 2025, filed in 2026, tax parameters will rise by an average of 2.8%, ensuring fairness amid inflation.
Revenue Procedure 2024-40 PDF provides detailed information on adjustments and changes to more than 60 tax provisions that will impact taxpayers when they file their returns in 2026.
Federal Tax Rates and Brackets for 2025
The tax rates remain unchanged, but income thresholds have been adjusted for inflation to prevent “bracket creep.” Here’s how they break down for different filing statuses:
As part of the Dirty Dozen tax scams and fraud awareness effort, the Internal Revenue Service (IRS) encourages people to report individuals who promote improper and abusive tax schemes, as well as tax return preparers who deliberately prepare improper returns.
In this second installment of our overview of the 2024 Dirty Dozen, we look at the stern warnings issued by the IRS regarding scammers who promote schemes designed to evade taxes, scams targeting the wealthy, and dubious social media advice.
Tax Evasion Pitched as “Tax Strategies”
Thinly veiled tax evasion schemes come in various forms and can pose significant threats to taxpayers, sometimes even involving international elements—for example, concealing money and digital assets in foreign accounts or using foreign captive insurance and foreign individual retirement accounts.
“Taxpayers should be wary of anything that seeks to completely eliminate a legitimate tax responsibility,” says IRS Commissioner Danny Werfel. “[Scammers] continue to peddle elaborate schemes to reduce taxes and make a handsome profit. Taxpayers contemplating these arrangements should always seek advice from a trusted tax professional, not an aggressive promoter focused on pushing questionable transactions to make a buck.”
Some prominent examples include exploitative agreements related to syndicated conservation easements, micro-captive insurance arrangements, foreign individual retirement arrangements, and “hidden” digital assets.
Syndicated Conservation Easements
A conservation easement is a restriction on the use of real property. Generally, taxpayers may claim a charitable contribution deduction for the fair market value of a conservation easement transferred to a charity if the transfer meets the requirements of Internal Revenue Code section 170.
In abusive arrangements, scammers syndicate conservation easement transactions, offering investors the opportunity to claim charitable contribution deductions and corresponding tax savings that far exceed the amount invested. These arrangements generate high fees for scammers and attempt to exploit the tax system with grossly inflated tax deductions.
Micro-Captive Insurance Arrangements
A micro-captive, also known as a small captive, is an insurance company whose owners elect to be taxed on the captive’s investment income only. Abusive micro-captives involve schemes that lack many of the attributes of legitimate insurance, such as implausible risks, failure to match genuine business needs, and unnecessary duplication of the taxpayer’s commercial coverages. The premiums paid under these arrangements are often excessive, reflecting non-arm’s length pricing. The IRS has made enforcement against abusive micro-captive transactions a high priority, prevailing in related Tax Court and appellate court cases since 2017.
Schemes with International Elements
Scammers may also promote tax avoidance through contributing to foreign individual retirement arrangements, which allow contributions in a form other than cash and do not limit the amount of contributions by reference to employment or self-employment activities. By improperly asserting this as a “pension fund” for U.S. tax treaty purposes, the taxpayer claims an exemption from U.S. income tax on gains and earnings in, and distributions from, the foreign individual retirement arrangement.
The Foreign Account Tax Compliance Act (FATCA) plays a critical role in combating tax evasion by U.S. persons holding accounts and other financial assets offshore. It requires most U.S. taxpayers with financial assets outside the United States to report these assets to the IRS, and certain foreign financial institutions must report directly to the IRS about financial accounts held by U.S. taxpayers. Reporting requirements carry penalties for failure to file.
Despite these measures, scammers continue to lure U.S. persons into placing their assets in offshore accounts and structures, falsely claiming they are out of reach of the IRS. These assertions are untrue, as the IRS can identify and track anonymous transactions of foreign financial accounts.
“Untraceable” Digital Assets
Digital assets are digital representations of value recorded on a cryptographically secured, distributed ledger or similar technology. Common examples include convertible virtual currency, cryptocurrency, stablecoins, and non-fungible tokens (NFTs).
Scammers often falsely claim that digital assets are untraceable and undiscoverable by the IRS. In reality, the IRS can track anonymous transactions of digital assets globally. For federal tax purposes, digital assets are treated as property, and general tax principles applicable to property transactions apply to transactions using digital assets.
Aggressive Tax Strategies Targeting the Wealthy
The IRS has also issued a warning to high-income individuals about three specific tax traps designed by scammers and shady tax practitioners. Wealthy taxpayers are particularly susceptible to schemes that promise to reduce their tax burden but can lead to severe legal consequences.
High-income individuals often become targets for various aggressive tax strategies and schemes. These strategies can range from inflated art donation deductions to aggressive charitable remainder annuity trusts and complex shelters designed to delay the payment of gains on property.
Improper Art Donation Deductions
Some scammers exploit art donations by promising inflated values. These scammers encourage taxpayers to purchase art at a “discounted” price, which may include additional services like storage, shipping, appraisal, and donation arrangements. The scammers claim that the art is worth significantly more than the purchase price, encouraging taxpayers to donate the art after a year and claim a tax deduction for an inflated fair market value.
The IRS has a team of professionally trained appraisers who assist in valuing personal property and works of art to ensure compliance with tax laws. Commissioner Werfel warned, “Creativity in art is a beautiful thing, but aggressive creativity in art donation deductions can paint a bad picture for people pulled into these schemes. Taxpayers should be careful to understand the rules and watch out for inflated values or questionable appraisals.”
Charitable Remainder Annuity Trust (CRAT)
A Charitable Remainder Annuity Trust (CRAT) is an irrevocable trust allowing individuals to donate assets to charity while drawing annual income for life or a specific period. However, some scammers misuse CRATs to eliminate capital gains improperly.
In these schemes, appreciated property is transferred to a CRAT, and the transfer is wrongly claimed to provide a step-up in basis to fair market value. The CRAT sells the property without recognizing gain and uses the proceeds to purchase a single premium immediate annuity (SPIA). The beneficiary then reports only a small portion of the annuity as income, misapplying the rules to exclude the remaining payment as a return of investment. Taxpayers should be wary of such schemes, as they misapply the laws relating to CRATs.
Monetized Installment Sales
Monetized installment sales are another aggressive tax strategy used by scammers to defer gain recognition on the sale of appreciated property. In these transactions, an intermediary purchases the property in exchange for an installment note, which typically includes interest-only payments with the principal due at the end of the term.
The seller receives most of the proceeds but improperly delays gain recognition until the final installment payment, often scheduled many years later. This strategy can lead to significant legal trouble as it abuses the tax system.
The IRS urges wealthy individuals to remain cautious and seek advice from independent tax or legal professionals. By avoiding scammers and understanding the rules, taxpayers can protect themselves from schemes that distort tax laws and result in severe penalties.
Bad Tax Advice on Social Media
The IRS has also warned taxpayers about the dangers of bad tax information circulating on social media. Platforms like TikTok are rife with inaccurate or misleading tax advice, which can lead to serious consequences, including identity theft and tax problems.
Social media can often spread incorrect tax information, where users share wildly inaccurate advice. Some schemes involve urging people to misuse common tax documents like Form W-2 or more obscure ones like Form 8944, a technical e-file form not commonly used by taxpayers. Both scams encourage the submission of false information in hopes of obtaining a refund.
The IRS is aware of various filing season hashtags and social media topics leading to inaccurate and potentially fraudulent information.
Fraudulent Advice on Form W-2
One scheme encourages people to use tax software to manually fill out Form W-2, Wage and Tax Statement, and include false income information. Scam artists suggest making up large income and withholding figures, as well as the employer details. They instruct people to file the bogus tax return electronically in hopes of getting a substantial refund, sometimes as much as five figures.
Another example involves Form 8944, Preparer e-file Hardship Waiver Request. False claims circulating on social media suggest that taxpayers can use this form to receive a refund from the IRS, even if they have a balance due. This information is incorrect. Form 8944 is intended for tax return preparers who request a waiver to file returns on paper instead of electronically.
Taxpayers who intentionally file forms with false information can face severe consequences, including civil and criminal penalties, such as criminal prosecution for filing a false tax return and a frivolous return penalty of $5,000.
Verifying Tax Information
The best place for taxpayers to learn how to properly use tax forms and follow legitimate social media channels related to taxes is IRS.gov. The website provides a repository of forms with detailed instructions and links to official IRS social media accounts.
Reporting Fraud
To report such activities, individuals can use the online Form 14242. The form can also be printed and completed to be sent by mail or fax to the IRS Lead Development Center in the Office of Promoter Investigations:
Internal Revenue Service Lead Development Center
Stop MS5040
24000 Avila Road
Laguna Niguel, CA 92677-3405
Fax: 877-477-9135
Alternatively, taxpayers and tax practitioners may send information to the IRS Whistleblower Office for a possible monetary award.
If you’ve been losing sleep over the possibility of a tax audit, put your mind at ease. Here are five reasons why you might want to stop worrying about it.
A Tax Audit is Not Always Trouble
An audit doesn’t automatically mean you’re in trouble. Sometimes, it’s just a random selection. Even if there’s a discrepancy in your return, like a math error or typo, the IRS may simply ask for additional documents or an amended return.
Most tax audits focus on returns filed within the last three years. Rarely do they go back more than six years, so you don’t need to worry about ancient tax seasons.
Reduce Your Risk
Certain items on your tax return can attract the IRS’s attention. Just be diligent and accurate in your data collection which can reduce your chances of an audit.
Stay Calm
If the IRS does audit you, don’t panic. It’s a specific process, and you can work through it with the right documentation. This is why it is important to work with a certified tax preparer or better yet, an Enrolled Agent. An Enrolled Agent (EA) is an individual who has earned the privilege of representing taxpayers before the Internal Revenue Service (IRS).
For taxpayers in the middle or lower income range and have relatively uncomplicated taxes, the likelihood of an IRS audit is quite minimal. For example: between the years of 2010 to 2019, the IRS audited approximately 0.25% of individual tax returns on record.
The IRS usually focuses their audits on high income earners. In 2019, a little more than 2% of Americans earning more than $5 million per year had their taxes audited. That’s down from 16% in 2010. “For taxpayers earning over $1 million, there has been substantial reduction in audit rates, but they are still audited more frequently than taxpayers earning below $200,000,” said Alex Muresianu, a policy analyst at the Tax Foundation.
Learn how to avoid the possibility of a tax audit…
Be thorough and accurate when reporting all of your expenses
Itemizing tax deductions with accuracy is essential
Provide appropriate details when required
File your taxes on time, as much as possible
Avoid amending returns. If you must, proceed with caution
Check your math. Now, check it again
Avoid using round numbers
Do not make too many deductions
Although there is no guarantee that the IRS won’t audit you, knowing some specific facts about tax audits during the filing process can help alleviate your concerns.
Preparing to file your federal tax return? Review some common mistakes people make and how you can avoid them this tax season.
Making a mistake on your tax return can slow down its processing and even delay your refund. If the IRS spots any errors, they may reject your return, requiring you to correct the issue and resubmit it promptly. Many common tax return mistakes are simple human error, unrelated to the complex tax laws provided.
By paying a bit more attention and double checking your information, you can make tax season smoother and error free.
Let’s review some common mistakes and ways to resolve them.
Don’t miss out on tax deductions and credits…
There are various tax deductions and credits, such as the Earned Income Tax Credit, that can help lower your tax liability and even increase your tax refund. However, if you overlook a specific tax break on your return, the IRS won’t notify you what may have been missed. Be diligent in reviewing all deductions and credits.
Hiring a tax preparer will further help in finding the best deductions and credits for you.
Providing incorrect Social Security information…
A recurring error is entering your Social Security Numbers (SSNs) incorrectly. If your SSNs on your tax return are wrong, the IRS will decline it. Many tax benefits available, like the Child Tax Credit, education credits, or Child and Dependent Care Credit, depend on accurate SSNs. Make sure when filing your return you double check all SSNs for typos or inconsistencies.
Names do not match up with Social Security cards…
Surprisingly, one of the main reasons the IRS will reject tax returns is due to a name mismatch. While misspellings can occur, the primary issue is when a dependent child’s name doesn’t match the name on their Social Security cards. The IRS database is synchronized with the Social Security Administration (SSA). Therefore, if the IRS system can’t find a specific name on your tax return in the SSA’s database, it will outright reject the return. Although this is an easy fix, your return will not be processed until the correction is made.
Not entering your income…
If you accidentally omit your exact income on your tax return, the IRS will notify you. They track income deposited into your bank and any investment accounts using your SSN and tax forms. If a mistake is found, you might owe penalties and interest on that unreported income. Therefore, it is wise to double check that all your income is reported properly before filing your return.
Choosing an incorrect filing status…
The IRS determines many tax deduction amounts, including the standard deduction, based on filing status. Therefore, it’s crucial to meet the strict criteria for each status. Your options include:
Single
Head of household
Married filing jointly
Married filing separately
Qualifying widow or widower
Choosing the wrong filing status will result in the IRS denying your return. Sometimes, you may qualify for more than one status. In such cases, select the one that offers a larger tax refund or a lower tax payment.
Work with your tax preparer to make sure you choose the correct status.
One of the most frequent mistakes on tax returns is incorrect calculations. Errors in your math or transferring numbers between forms can lead to an immediate correction notice from the IRS. These math mistakes might also reduce your tax refund or cause you to owe more than necessary.
Your tax preparer should be able to spot these errors for you, but make sure you are double checking your work for a better experience with your appointment.
Failing to meet the April tax return deadline…
The final tax return mistake is easy to avoid: ensure you file your tax return on time. If you need more time, submit Form 4868 by April 15 to get an automatic six month extension.
Keep in mind that you still need to pay any taxes owed by the Tax Day deadline (usually April 15) to avoid late filing penalties, interest, and fees. If you can’t afford to pay the full amount, the IRS offers payment plans.
Check with your preparer for more information.
Incorrect account numbers or routing information for direct deposits…
If you opt for a direct deposit of your refund into one or multiple banking accounts, make sure you double check the bank account numbers you enter. Even a single incorrect digit can lead to several extra weeks of waiting for your refund, someone else receiving your tax refund, or your refund being returned to the IRS.
The key to a quick and efficient tax year is to work with your tax preparer to help resolve any mistakes. Double check your information and verify all data to have a successful tax season.
This blog post serves as informational content and does not constitute legal or financial advice.
Many businesses, enticed by misleading information, have found themselves unwittingly in non-compliance with ERC regulations. The IRS has urged tax preparers to act soon to verify their compliance, emphasizing the need for proactive review and correction.
To help tax preparers who are victims of misinformation, the IRS established the ERC Voluntary Disclosure Program. This program offers an opportunity for businesses to rectify erroneous filings by repaying only 80% of the claimed amount. Additionally, for claims pending processing, prompt action is advised to initiate the withdrawal process if eligibility criteria are not met.
The March 22 deadline for the Voluntary Disclosure Program is swiftly approaching, however, so it is imperative that businesses reassess their claims.
Seven warning signs of ERC non-compliance
The genesis of these cautionary measures lies in the deceptive marketing tactics employed by certain entities, which oversimplified ERC eligibility requirements. The IRS has highlighted seven key warning signs indicative of potentially erroneous claims, drawing attention to common pitfalls.
Excessive Quarters Claimed: Claiming ERC for all available quarters without meeting eligibility criteria.
Misinterpretation of Government Orders: Erroneously claiming ERC based on government orders without proper qualification.
False Reliance on OSHA Communications: Incorrectly citing Occupational Safety and Health Administration (OSHA) communications as grounds for ERC eligibility.
Inaccurate Employee Count and Calculations: Overclaiming by including ineligible wages or miscalculating credit amounts.
Unsubstantiated Supply Chain Disruptions: Erroneously attributing ERC eligibility to supply chain disruptions without meeting requisite conditions.
Misrepresentation of Tax Period Coverage: Falsely claiming ERC for entire tax periods without meeting suspension criteria.
Nonexistent or Ineligible Business: Claiming ERC for periods when no wages were paid or when the business did not exist.
Businesses must exercise caution and seek guidance from reputable tax professionals to navigate the complexities of ERC claims. It is essential to avoid promoters who fail to request detailed business records or exhibit a lack of understanding of eligibility criteria.
Tax preparers are responsible for staying informed and ensuring accurate ERC claims. The IRS provides valuable resources, including FAQs and an ERC Eligibility Checklist, to aid in understanding eligibility criteria. By leveraging these resources and fostering a proactive approach, tax preparers can protect themselves against ERC fraud and penalties for non-compliance.
Tax season is in full swing, and with it comes a surge in scams targeting tax professionals. The Internal Revenue Service (IRS) and Security Summit partners have issued a warning about a new email scam that impersonates various software companies, aiming to steal Electronic Filing Identification Numbers (EFINs). These scams pose a serious threat to both tax professionals and their clients, potentially leading to identity theft and fraudulent tax filings.
What is the EFIN documentation scam?
This recently growing scam involves fraudulent emails masquerading as communications from tax software providers. The emails request EFIN documents from tax professionals under the guise of a required verification process to transmit tax returns.
Unsuspecting victims who fall for this scam risk exposing sensitive client data and their own identities to malicious actors.
What is the IRS doing to mitigate the threat?
In response, the IRS is taking proactive measures to educate and protect tax professionals. Special educational webinars begin on February 12th, aimed at providing crucial information and strategies to combat this scam.
IRS Commissioner Danny Werfel emphasized the importance of remaining vigilant during this busy period, urging tax professionals to prioritize security measures within their practices.
How active is the EFIN documentation scam?
The IRS has already received numerous reports of this scam targeting tax professionals. Signs of a potential scam email include requests for EFIN documents via fax, instructions to obtain EFIN documentation from the IRS e-Services site, and inconsistencies in the email wording. Tax professionals who receive such emails are advised not to respond or take any action outlined in the message.
One example of the fraudulent email includes instructions to fax EFIN documents to a specified number, along with warnings that failure to comply will result in an inability to transmit tax returns:
Dear [recipient_email_address],
Help us protect you.
Because many Electronic Filing Identification Numbers (EFINs) are stolen each year and used to file fraudulent tax returns, the IRS has asked software vendors, such as Software A, to verify who the EFIN owner is by getting a copy of the IRS issued EFIN document(s). Our records show that we do not have a document for one or more of the EFINs that you transmit with.
What this means for you: Until your EFIN is verified, you will be unable to transmit returns. Please provide a copy of your EFIN Account Summary from IRS e-Services, with a status of ‘Completed’, to Software B for verification.
To send us your EFIN Summary document:
Fax to Software B at 631-995-5984
PLEASE NOTE THAT YOUR PREPARER TAX IDENTIFICATION NUMBER (PTIN) APPLICATION CANNOT BE USED AS DOCUMENTATION FOR YOUR EFIN.
If you do not have the above documentation you can get a copy of your IRS Application Summary from IRS e-Services by following the below steps or call the IRS e-Services helpline at 866-255-0654.
Sign in to your IRS e-Services account
Choose your organization from the list provided and click Submit
Click the Application link to access your existing application
Click the e-File Application link
Select the existing application link that applies to your organization
Click the Application Summary link for the area of the application you wish to enter
Click the Print Summary link at the bottom of the summary presented on the screen
If you have any questions please contact the Compliance Department at xxx-xx-xxxx for assistance.
Thank you for your business. We look forward to serving you this coming season. Software B (edited)
What will the IRS webinars on the EFIN scam cover?
Tax professionals are encouraged to attend the upcoming webinars hosted by the IRS, where cybersecurity experts will provide valuable insights and guidance. These sessions will equip professionals with the knowledge needed to identify and prevent potential scams, ensuring the security of their clients’ data and their own identities.
What else can tax professionals do to avoid becoming victims?
In addition to attending webinars, tax professionals are advised to remain vigilant against other phishing scams targeting EFINs, PTINs, and e-Services credentials. The IRS stresses the importance of promptly reporting any suspicious activity to the appropriate authorities, including the Treasury Inspector General for Tax Administration (TIGTA) and local IRS Stakeholder Liaisons.
As tax-related identity theft scams continue to evolve and proliferate, tax professionals must stay informed and proactive in safeguarding sensitive information. By remaining vigilant and taking proactive measures, tax professionals can help protect themselves and their clients from falling victim to these fraudulent schemes.
For more information and resources on identity theft prevention, tax professionals can visit the IRS’s Identity Theft Central and refer to Publication 4557, Safeguarding Taxpayer Data. Stay informed, stay vigilant, and stay protected during this tax season and beyond.
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