IRS Urges "Extreme Caution" About Claiming Tax Credits

The agency has issued alerts warning against improperly using them when you file.

Even though everyone has a determined number of what they owe the Internal Revenue Service (IRS) every year in taxes, that's not always the amount that they end up paying. There are also standard deductions and other considerations that can bring that number down. But if you misapply deductions, you could wind up liable for paying back the agency what it's owed, getting fined, or both. And as we reach the end of the year, the IRS is urging "extreme caution" about claiming certain tax credits. Read on to see what you might want to leave out of your next filing.

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The Employee Retention Credit was created to help businesses during the COVID pandemic.

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In addition to deductions, tax credits can be a way to lower your tax bill when it comes time to pay. Those who are eligible can work with a list of standard options that include things like environmentally friendly purchases, having children, and investing in retirement or education, among others, according to the IRS.

However, the list of what's available can change over time as legislation gets passed and policies change. The Employee Retention Credit (ERC) is one such example. It was created on Mar. 27, 2020 to help employers and small businesses keep employees on their payroll during the COVID-19 pandemic.

While not available to individuals, the ERC allowed businesses that were shut down during the pandemic or saw a "decline in gross receipts" to claim a credit equal to 50 percent up to $10,000 paid out in wages, per the IRS.

RELATED: IRS Issues New Alert on What You Must Do Before the Year Is Over.

The IRS is now warning it's rejecting many claims for the ERC due to heavy abuse.

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People bending the truth to lower their tax bill is nothing new, and getting caught running afoul of the rules can be a costly mistake. Now, the IRS has announced that it is taking a harder look at filings that claimed the ERC and sending out more than 20,000 disallowance letters to taxpayers, according to a Dec. 6 press release from the agency.

The agency explains that it determined a large number of taxpayers didn't qualify for the credit after a lengthy review earlier this year. Those not in compliance included operations that didn't exist or had no employees during the eligible time frame. The IRS says that the problem may have been made worse by companies that targeted small businesses and pushed them to make ERC claims on their filings, then charging them for their services.

"With the aggressive marketing we saw with this credit, it's not surprising that we're seeing claims that clearly fall outside of the legal requirements," IRS Commissioner Danny Werfel said in the agency's statement. "The action we are taking today is part of an initial set of steps in our compliance work in this area, and more letters will be going out in the near future, including both disallowance letters and letters seeking the return of funds erroneously claimed and received."

The agency used the opportunity to remind taxpayers they could file to withdraw any ERC claims they may have made in error. This will allow those who have yet to receive a refund to avoid paying any penalties, interest, or future repayment.

RELATED: The No. 1 Reason You Could Get Audited by the IRS, Experts Warn.

The fuel tax credit is another program aimed at helping small businesses.

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Some businesses can also claim a fuel tax credit on their filing to reduce what they owe. The program helps to encourage the use of renewably sourced fuel, including biodiesel and renewable diesel, according to the IRS.

Fuel tax credits are relatively limited in their scope and are rarely available to individuals. They're primarily intended for off-highway business use, farming and agriculture, bus transportation, and certain fuels used for planes, according to TurboTax.

The claim is also enticing because it works dollar-to-dollar. This means that a business claiming it spent $1,000 on renewable fuels would be able to take $1,000 off of its tax bill, per TurboTax.

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The agency listed the credits in their "Dirty Dozen" of tax scams after an increase in false claims.

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Like the ERC, fuel tax credits have been the target of the IRS due to overuse. In a press release on Mar. 23, the agency listed it as one of its "Dirty Dozen" tax scams as it saw an increase in bogus claims using Form 4136.

"People should watch out for erroneous fuel tax credit claims and the scammers that promote them," Werfel said in the release. "These scammers will often charge a hefty fee for these bogus claims, and participants also face the possibility of identity theft. This is another example that people should always remember: Be wary if a tax deal sounds too good to be true."

The agency warns that it's taken steps to beef up compliance efforts surrounding the claims, adding that it is now able to stop a "significant number of fuel tax credit refund claims" by using theft filters. They add that some taxpayers could face fines for knowingly making false claims.

Best Life offers the most up-to-date financial information from top experts and the latest news and research, but our content is not meant to be a substitute for professional guidance. When it comes to the money you're spending, saving, or investing, always consult your financial advisor directly.

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Zachary Mack
Zach is a freelance writer specializing in beer, wine, food, spirits, and travel. He is based in Manhattan. Read more
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