‘Encyclopedia of Fraud’ Would Help Taxpayers Spot Scams Early

Some tax fraud schemes are so outlandish that most taxpayers could recognize them as fraudulent from the outset. But sometimes, even the obvious frauds can be packaged in a way that makes them seem plausible.

The IRS should directly provide clearer and more accessible guidance that explains differences between legitimate planning and fraudulent avoidance. A comprehensive, user-friendly resource that describes these schemes and consequences of engaging in them could help taxpayers spot potential scams before falling victim to predatory tax preparers—or unwittingly committing fraud themselves.

That’s where a Wikipedia-style online encyclopedia on tax fraud, maintained by the IRS, could come in. The IRS already publishes a yearly list of fraudulent schemes—the “Dirty Dozen"—as well as ongoing rulings throughout the year. But much of the information is hard to find or too technical for the average taxpayer.

Imagine being told by your tax preparer that you should report hundreds of thousands of dollars in income that you had never actually earned—and also that all of that fictitious income was withheld by the IRS. The tax preparer promises a big refund check, but most taxpayers’ fraud senses would be tingling.

Some schemes are presented as legitimate, if sophisticated, tax planning strategies—the sorts that might be recommended by an enterprising tax adviser. The more sophisticated and well-packaged the scheme, the more likely the scheme could slip past a well-meaning taxpayer.

Preventing this type of fraud isn’t easy. The IRS must protect billions of dollars in vital tax revenue. And with the advent of Direct File, it’s increasingly working with and speaking directly to taxpayers.

At the same time, seemingly simple fraud schemes, such as underreporting income, have evolved into sophisticated operations that can pose as legitimate tax planning. Annual reports such as the Dirty Dozen make some headway in addressing the knowledge gap between tax experts and taxpayers, but they only highlight the most common or noteworthy tax scams for the preceding year.

Informing the taxpaying public of fraudulent schemes solely via the Dirty Dozen list is akin to policing solely via the FBI Most Wanted list. The public is made aware of the worst offenders, but up-and-coming threats operate with relative impunity—potentially for a long time.

With this approach, the response is delayed and incomplete. This is where an IRS-managed online encyclopedia of frauds and schemes could make a real difference. The IRS and tax courts already publish detailed information on tax frauds through press releases, court decisions, revenue rulings, and internal investigations, but much of this information is tucked away on sleepy government websites and in archived press releases.

A centralized encyclopedia could provide taxpayers with easy-to-understand descriptions of tax frauds, including real-life examples of their advertisement and implementation in practice. It could translate an abstract concept such as “syndicated conservation easements” into plainer language, outlining that such a scheme would involve an invitation to become a co-investor in a piece of property that will be donated to a conservation organization.

It might further inform taxpayers that such a scheme often involves inflating the value of the property intended for donation. That information would give taxpayers an understanding of how the fraud works and warning signs to look out for.

Such a database could lay out potential consequences. The IRS could inform taxpayers that no matter what varnish a tax preparer or plan promoter puts on a scheme, the authorities will treat it as tax fraud. The antidote to a “tricks the IRS doesn’t want you to know” promotional strategy is to communicate that the agency actively prosecutes taxpayers engaged in such “tricks.”

By compiling information in one place, the IRS could make it easier for taxpayers to independently verify the legitimacy of tax advice they receive. This doesn’t obviate the need for tax professionals, but it provides for an initial sniff test of their advice. Schemes that rely on complexities or vagueness may be deterred if a plain-language translation is readily available to would-be victims.

Under such a program, whenever a taxpayer is pitched a strategy, they would be able to find clear and concise information on why it may be illegal. The resource could provide common promotional keywords, warning signs, detailed breakdowns of fraud mechanisms, and red flags to note when working with tax professionals. The platform could also be updated regularly, offering near real-time information on emerging frauds.

Any concern that such a resource could be used as a blueprint for fraud should be allayed by the fact that it would only cover existing “in the wild” schemes. It wouldn’t point out loopholes to exploit—it would explain where past taxpayers erroneously believed there was a loophole. In doing so, it also could be viewed as a deterrent, like press releases for arrests and prosecutions of tax cheats.

Tax advice of varying degrees of legitimacy abounds online. If fraudsters are taking to TikTok to peddle their ideas, the IRS must create a first line of defense for taxpayers. Any plan for social media campaigns to combat bad tax advice should be grounded in a comprehensive online resource.

By making these resources easy to access and understand, the IRS would be empowering the public to make better decisions and continue to provide services and information directly to taxpayers. This protects both taxpayers and the government’s tax revenue—and makes the job of fraud peddlers that much more difficult.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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