The IRS warned on Tuesday that thousands of taxpayers could face criminal prosecution if they filed false tax returns for high refunds.
In a press release, the IRS reiterated a warning not to fall for tax scams centered around the Fuel Tax Credit, Sick and Family Credit, and household employment taxes.
Despite the warnings, the IRS reportedly came across thousands of dubious claims from taxpayers for credits for which they were not eligible. As a result, the IRS has delayed the refunds and is requesting the taxpayers under investigation to provide proof they are eligible for the credits.
"Scam artists and social media posts have perpetuated a number of false and misleading claims that have tricked well-meaning taxpayers into believing they’re entitled to big, windfall tax refunds," IRS Commissioner Danny Werfel said. "These bad claims have been caught during our fraud review process. Taxpayers who filed these claims should realize they’ve been tricked, and they face an extensive review process and a long potential wait if they’re owed a refund for other things."
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The Fuel Tax Credit is designed for off-highway business and farming use, the IRS said, and taxpayers who claim the credit are required to have a business purpose and qualifying business activity, like running a farm or purchasing gasoline for aviation purposes.
Taxpayers who claim the sick and family leave credit were required to be self-employed during the pandemic, or in 2020 and 2021. The credit was not made available for 2023.
"The IRS is seeing repeated instances 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 an employee and not as a self-employed individual," the IRS wrote.
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The IRS also said household employment taxes are being claimed by taxpayers who "invent" fictional household employees to claim a refund based on false sick and family medical leave wages they never paid.
"These improper claims have been fueled by social media and people sharing bad advice," Werfel said. "Scam artists constantly prey on people’s hopes and try to use the complexity of the tax system to convince people there are secret ways to get a big refund. These three credits illustrate that it’s important to carefully review the tax return for accuracy before filing and rely on the advice of a trusted tax professional, not some fly-by-night preparer or a questionable source they hear on social media."
Any taxpayer who the IRS flagged as potentially submitting any of these credits in their returns fraudulently will likely have their refund frozen until taking several steps to resolve the issue.
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If the refund has been frozen, the taxpayer should expect to get one of several letters from the IRS seeking additional information — things like identity confirmation, if they actually qualified for one of the three tax credits, or if they used a tax preparer.
If a tax preparer was used, the taxpayer will be asked to see if the preparer signed the tax return. If the return is not flagged, the IRS said, it is a red flag that the taxpayer was misled.
While taxpayers are not required to visit a Taxpayer Assistance Center to verify their identity, they may need to amend their tax return to remove the credit.
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The IRS also said legitimate taxpayers who qualified for the credit but were flagged, can submit documentation showing they qualify for the credit.
Still, anyone who did not qualify yet claimed the credit on their taxes could face a fine of up to $5,000 per return. The taxpayers will also risk being audited, and could face criminal prosecution, the IRS said.
