No one wants to end the tax season by cutting a big check to the Internal Revenue Service (IRS). That’s why many filers take advantage of tax credits to help lower their taxable income. Under the guise of a financial advisor, you may have included retirement contributions, investments, and other exemptions or tax credits in your filing. These are all legal ways to save on taxes—but now, the IRS is warning taxpayers they could face criminal prosecution for citing ineligible tax claims.
Similar to write-offs and deductible expenses, a tax credit is a “dollar-for-dollar amount taxpayers claim on their tax return to reduce the income tax they owe,” explains the IRS. If filed correctly, these credits can help bolster your potential refund.
But as for the 2023 tax season, the IRS says it’s experiencing an inflation of “improper” refund claims specifically linked to the Fuel Tax Credit, the Sick and Family Leave Credit, and household employment taxes.
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“The IRS has seen thousands of dubious claims come in where it appears taxpayers are claiming credits for which they are not eligible, leading to refunds being delayed and the need for taxpayers to show they have legitimate documentation to support these claims,” the government agency said in a press release.
According to the IRS, there has been a rise in ongoing “tax scams and inaccurate social media advice,” which has led thousands of taxpayers “to file inflated refund claims” for the 2023 tax season.
“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,” said IRS commissioner Danny Werfel.
In the consumer alert, the IRS explained that fraudulent refund claims “involve legitimate tax provisions, but they are limited to very specialized situations.” By not reading the fine print, innocent taxpayers could be putting themselves at risk of potential criminal prosecution.
For instance, the Fuel Tax Credit is reserved for off-highway businesses (like a company that utilizes aviation gasoline) and farming use. In other words, the average person can’t claim a tax credit for filling up their SUV due to an hours-long commute.
The IRS also noted that the Sick and Family Leave Credit was only available for self-employed individuals during the COVID-19 pandemic (2020-2021).
As for household employment tax credits, the agency is seeing a spike in “fictional household employees,” in which individuals invent in-home caretakers so they can “claim a refund based on false sick and family medical leave wages they never paid.”
“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,” instructed Werfel. “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.”
Those who did file any of these claims will need to prove their eligibility. The IRS advises taxpayers to speak with a trusted tax preparer to review the guidelines and, if a credit was wrongfully claimed, to file an amended return to avoid potential penalties—including financial fees, comprehensive audits, and criminal action.
If the IRS was alerted of your return during their fraud review process, your refund will be temporarily frozen until the return is legitimized. Taxpayers can review the IRS’ full list of recommendations and resources in the release.
