Beware of Excessive Refunds! IRS Warns of Common Tax Scams

Taxpayers could fall victim to scams if they filed false claims for tax credits. 

The Internal Revenue Service (IRS) today issued a consumer alert over concerns about a series of tax scams and inaccurate advice on social media that led thousands of taxpayers to file claims for excessive refunds during the last tax season. 

The IRS warned taxpayers not to fall for these scams centered on the Fuel Tax Credit, the Sick and Family Leave Credit, and household employment taxes. The IRS has observed thousands of questionable claims where it appears taxpayers are applying for credits for which they are not eligible, leading to refund delays and the need for taxpayers to prove they have the legitimate documentation to support these claims. 

The IRS continues to urge taxpayers to avoid these scams as myths persist that these are methods of getting a large refund. Many of these scams were highlighted during this spring's annual "Dirty Dozen" series, including the Fuel Tax Credit scam, bad advice on social media, and "ghost preparers." 

For taxpayers who fell into these traps, they should follow the steps to verify their eligibility for the claim. Some taxpayers could also face severe financial penalties, possible follow-up audits, or criminal action for improper claims. The IRS encourages people to review the guidelines, speak with a trusted tax preparer and, in some cases, file an amended return to eliminate claims for which they are not eligible and avoid potential penalties. 

Common Problems: Fuel Tax Credit, Sick and Family Leave Credit, and Domestic Employment Taxes 

The IRS has identified three common themes that continue to crop up among these improper refund claims. They involve legitimate tax provisions but are limited to very specialized situations. Most related claims do not qualify: 

Fuel Tax Credit: This specialized credit is designed for off-highway business and agricultural use. Taxpayers need a business purpose and qualifying business activity, such as running a farm or buying aviation gasoline, to be eligible for the credit. Most taxpayers do not qualify for this credit. 

Sick and Family Leave Credit: This specialized credit is available to self-employed individuals for the years 2020 and 2021 during the pandemic; the credit is not available for 2023 tax returns. The IRS is seeing repeated cases where taxpayers are incorrectly using Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, to incorrectly claim a credit based on income earned as employees and not as self-employed individuals. 

Domestic Employment Taxes: Taxpayers "invent" fictitious household employees and then file Schedule H (Form 1040), Household Employment Taxes, to claim a refund based on false wages for sick leave and family medical leave that they never paid. 

Potentially fraudulent refunds frozen; Improper Claims Could Face Enforcement Actions 

Given the questionable nature of many of these claims, the IRS has frozen refunds for these taxpayers. Taxpayers must take several specific steps to resolve these issues. 

Taxpayers whose returns have been frozen will usually receive one of several letters from the IRS asking for additional information. Initially, taxpayers may have received a letter requesting to verify their identity. In these situations, if they filed the return in question, they should check to see if their tax return is accurate. For example, did they really qualify for one of the three credits listed above? Or if they used a tax preparer, check to see if the preparer signed the tax return. When tax preparers do not sign a tax return, it is a red flag that the taxpayer is being cheated. 

Taxpayers who improperly claimed these credits must still authenticate their identity. Once the taxpayer's identity has been verified, they may need to amend their tax return to remove the improperly claimed credit. 

Taxpayers should use the IRS tool in IRS.gov "Should I File an Amended Return?" to determine if they should amend their return. The amended return will not be accepted until the taxpayer authenticates and the original return has completed processing. 

Several taxpayers who initially received correspondence asking for their identity may be receiving an additional letter requesting additional documentation to show that they qualify for the credits they claimed. Taxpayers who verified their identity in person can receive these letters. Taxpayers who have not yet verified their identity and receive one of these letters requesting additional documentation should follow the advice in the most recent letter. 

These letters – IRS Notice 3176c – apply to potentially frivolous tax returns, including incorrect claims for Fuel Tax Credits, Sick and Family Leave Credits, and household employment taxes. 

Legitimate taxpayers who qualify for these credits can submit documentation showing that they qualify for the credit. But people who do not qualify for these credits risk facing a penalty of up to $5,000 per return for filing a frivolous claim. Taxpayers who file inaccurate claims also face the risk of an audit. Those who intentionally filed a false tax return also potentially face criminal prosecution. 

To avoid penalties and potential follow-up actions by the IRS, taxpayers who improperly filed these claims should quickly file an accurate tax return without the claims. Taxpayers can visit the IRS tool in IRS.gov "Should I File an Amended Return?" to determine if they should amend their return. The amended return will not be accepted until the taxpayer authenticates and the original return has completed processing. 

The IRS noted that the total amount of the refund is frozen on returns with these improper claims. Taxpayers will not receive any part of their refund, even if they also claimed legitimate credits. 

For more information and guidance, visit IRS.gov or consult a trusted tax professional. 

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