As homeowners view the devastation from the Eaton and Pacific Palisades fires in Southern California, it is a good opportunity to review your preparations in case of a natural disaster. Many homeowners had a short amount of time to gather family pictures, important papers and clothing before they evacuated. Some were forced to abandon cars on clogged roads and flee on foot.

The Internal Revenue Service (IRS) reminds taxpayers that the season for natural disasters is approaching. The springtime can bring floods while summer is known for tornadoes and windstorms. In the fall season, there is a higher risk for fires and hurricanes.

With the substantial risk of floods, fires, tornadoes, windstorms, hurricanes and other natural disasters, it is important for all Americans to take protective steps. These steps could include securing and duplicating essential documents, creating documentation of collections and other valuable properties and understanding how to find assistance. By preparing ahead, taxpayers will be able to recover financially from a natural disaster faster with proper documentation.

1. Secure Your Documents — You should keep your important documents in waterproof containers and in a secure location. Important items include your tax returns, birth certificates, deeds to your home and other property, insurance policies and similar documents. Some individuals choose to have a copy of these documents held by a relative or friend in a different state.

2. Copies of Documents — Some of your documents are available only on paper, so you may wish to scan them into a digital file format. Once they are scanned, you have the option of transferring the documents to a commercial cloud-based storage system for additional security.

3. Inventory of Valuables — Taxpayers should have a detailed inventory of valuable property. You may take photos or videos of collections, art, jewelry or other valuable items. It is also helpful to have a general description of your property, which may include the make and model numbers of some items.

4. How to Get Help — If you are the victim of a natural disaster, it is important to understand how to obtain assistance. You will want to contact your insurance agent to report the loss. Some financial institutions can provide statements and electronic documents that may assist you in rebuilding your financial affairs. The IRS.gov site has a helpful page called "Reconstructing records after a natural disaster or casualty loss."

5. IRS Assistance — The IRS provides assistance after a federal disaster has been declared. The IRS “Tax relief in disaster situations” webpage may be helpful. In many cases, the IRS delays filing or tax payment dates. The date will be specific for your affected area, so check visit IRS.gov for details. There also is an IRS disaster hotline at 866-562-5227.

6. Disaster Loss Deduction — If you have a substantial loss, you may qualify for a disaster loss deduction. The uninsured or unreimbursed disaster loss may be deductible. Check out the rules set forth in IRS Publication 547, Casualties, Disasters, and Thefts.

Everyone should prepare and be ready for natural disasters. It is important to develop an evacuation plan and set aside essential items before a storm or other disaster threatens your life and property.

Dirty Dozen Scams I

On February 27, 2025, the Internal Revenue Service (IRS) announced the annual Dirty Dozen list of tax scams for 2025. The IRS noted that Dirty Dozen scams generally peak during tax filing season. While these scams can occur throughout the year, the filing season is a great opportunity for fraudsters to steal data and personal information. The fraudsters use this information to file fraudulent tax returns and claim large refunds before the actual taxpayer files his or her return.

IRS communications senior advisor, Terry Lemons, noted, "Scammers are relentless, and they use the guise of tax season to try tricking taxpayers into falling into a variety of traps. These red flags can lead to everything from identity theft to being misled into claiming tax credits for which they are not entitled. For more than two decades, the IRS has highlighted the Dirty Dozen through far-reaching communications and education campaigns as part of a wider effort by the agency to protect taxpayers from being scammed."

There has been a surge of social media scams this year. The IRS and other tax-preparation companies have created a Coalition Against Scam and Scheme Threats (CASST) to warn taxpayers about social media scams.

The first six of the Dirty Dozen scams generally involve making unusual or implausible claims.

1. Email Phishing Scams — Taxpayers and advisors should be on guard for two main types of phishing scams. The first is through email where the fraudster will offer a phony tax refund or threaten the taxpayer with legal or criminal charges. Many fraudsters now are also using smishing, which sends a smartphone text message that is designed to create alarm for the user. The most frequent messages are "Your account has now been put on hold" and "Unusual Activity Report." The fraudulent emails or text messages include a link that downloads malware to the computer or phone and is designed to allow the thief to steal your identity.

2. Social Media Advice — There has been dramatic growth of incorrect tax information on social media. This can mislead taxpayers and cause serious tax problems. A rising problem exists on social media platforms, including on TikTok. The IRS notes there is "wildly inaccurate tax advice" on this social media platform. The best protection is to use IRS or tax professional social media sites for advice. Both the IRS and large tax preparer firms have YouTube channels with reputable advice.

3. Online Account Help — Many fraudsters offer to be a "helpful" third-party in creating your IRS Individual Online Account. The IRS explains there is no need for outside help. A taxpayer can go to IRS.gov to set up the IRS Individual Online Account. The IRS Individual Online Account is quite useful because you can use it to obtain personal tax information. The fraudster may offer to help you but then use access to steal your personal information. This is then used to submit a false tax return and claim a large refund. When you file later, your refund may be denied or seriously delayed.

4. Fake Charities — There are many reputable charities that serve those in need, particularly during a crisis or natural disaster. However, fraudsters will often set up fake organizations with similar names and take advantage of donors. Donors can check out reputable charities through their website. Taxpayers also may work with their advisors to use the Tax Exempt Organization Search (TEOS) tool on IRS.gov to verify reputable charities. Some religious organizations may not appear in the search tool because they are exempt from filing.

5. Fuel Tax Credits — Many taxpayers have been persuaded to file a claim for a Fuel Tax Credit. This credit is meant to offset the tax for vehicles that are used in farming and other off-highway businesses. This credit is not available to taxpayers who have automobiles or vehicles that are used on the public roads. However, there are social media fraudsters who urge individuals to file Form 4136, Credit for Federal Tax Paid on Fuels. This is not allowed for typical vehicles that use public roads.

6. Sick Leave and Family Leave — During the 2020 and 2021 pandemic, there was a special credit for individuals for sick or family leave. However, this credit is not available for later tax years, including 2024. Fraudsters persuade taxpayers to use Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, however, this credit is no longer available.

Editor's Note: Fraudsters have often had success with hundreds of individuals. Taxpayers and advisors should recognize that the fraudsters are becoming steadily more skillful in obtaining information from individuals. It is important for advisors to caution taxpayers to be on the lookout for these problems. If individuals are not certain about an email, text or call that they have received, they should contact their qualified tax professional to verify the information.

Dirty Dozen Scams II

The second half of the Dirty Dozen scams include obvious false or fraudulent claims.

1. Self-Employment Tax Credit — There are many social media posts that claim a self-employed person can receive a large payment up to $32,000 for the "Self-Employment Tax Credit." This is a nonexistent credit. There were some related types of credits during the pandemic, but those credits no longer exist. Claiming a nonexistent credit is likely to delay any tax refund.

2. Household Employment Taxes — Some social media posts encourage individuals to "invent" a fictional household employee. The taxpayer then files Schedule H (Form 1040), Household Employment Taxes and claims a refund based on nonexistent sick and family medical leave wages that were never paid. This is an obvious and easily discovered fraud.

3. Overstated Withholding — A recent social media scheme encourages individuals to fill out IRS Form W-2, Wage and Tax Statement, with inflated income and withholding information. Some taxpayers have made up large income and withholding amounts and then file an electronic return claiming a substantial refund. Once again, the IRS software will generally check the withholding amounts and discover the false information. Some fraudsters claim the taxpayer can still be successful with this false information by filing Forms 1099-R, 1099-NEC, 1099-DIV or 1099-OID.

4. Offers in Compromise (OIC) — The IRS allows some individuals with limited financial capabilities to settle federal tax debts with a payment plan or at a reduced amount. However, there are always companies that claim that they can reduce your tax to near zero through their skill with Offers in Compromise and charge thousands of dollars as a fee. Many of these companies receive large payments and then go out of business. The taxpayers lose both their payment to the OIC "mill" and still owe thousands in back taxes and interest to the IRS.

5. Ghost Tax Return Preparers — The majority of tax preparers provide highly professional service. However, taxpayers should be careful to avoid "ghost" tax preparers. These preparers will often charge a fee based on the size of the refund. They may ask the taxpayer to sign a blank return. The tax preparer also may violate federal law by not including their Preparer Tax Identification Number (PTIN) on the return.

6. Spear Phishing — The "new client" scam continues to trap unsuspecting tax preparers. The fraudster claims to be a new potential client and creates a chain of emails. If the tax professional responds to a series of emails, the scammer and tax professional create what appears to be a genuine client relationship. After trust is built, the fraudster sends an email with a link that downloads malware on the tax preparer’s computer system. This is called “spear phishing” because the tax professional is specifically targeted by the fraudster. The spear phishing attack can result in massive amounts of stolen client data. The identity thief will then use this information to file many fraudulent returns using the tax professional’s clients’ information.

The Dirty Dozen is an effort by the IRS to highlight abusive schemes and bogus tax avoidance methods. Taxpayers and professionals can use IRS Form 14242-Report Suspected Abusive Tax Promotions or Preparers to report these fraudsters.

Editor's Note: The second group of the Dirty Dozen methods are generally obvious fraud. Taxpayers who do basic research discover these are not valid strategies. Taxpayers are urged to contact their professional advisor if they have questions about these methods. There are legitimate and appropriate strategies to reduce tax payments, and a professional advisor is the best source of information regarding these concepts.

Applicable Federal Rate of 5.4% for March: Rev. Rul. 2025-6; 2025-11 IRB 1 (19 February 2025)

The IRS has announced the Applicable Federal Rate (AFR) for March of 2025. The AFR under Sec. 7520 for the month of March is 5.4%. The rates for February of 5.4% or January of 5.2% 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 2025, pooled income funds in existence less than three tax years must use a 4.0% 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.”