Thousands of Taxpayers Could Face $5,000 Penalty After Falling for Online Scams: IRS

A 1040 form used by American taxpayers to file an annual income tax return is shown in an undated file photo. Joe Raedle/Getty Images

The Internal Revenue Service (IRS) has warned that thousands of American taxpayers who fell victim to online tax scams could face fines of up to $5,000.

The agency issued a consumer alert on Tuesday amid what it said were “ongoing concerns” regarding a series of tax scams and “inaccurate social media advice” that led thousands of taxpayers to file inflated refund claims during the past tax season.

The false claims are being perpetuated by scam artists online, the IRS said.

“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. “These bad claims have been caught during our fraud review process.”

The tax scams centered around the Fuel Tax Credit, Sick and Family Credit, and household employment taxes, and ways in which taxpayers can obtain huge refunds, according to the IRS.

The agency said it has seen “thousands of dubious claims” during the past tax season in which it appears as though taxpayers are claiming credits for which they are not eligible.

Due to the “questionable” nature of many of these claims, the IRS has frozen the refunds for these taxpayers, agency officials said.

Additionally, the IRS is requesting that taxpayers currently under investigation provide supporting documentation, such as personal identification documents, showing they are eligible to receive the credits.

Taxpayers who are not eligible for the credits risk a penalty of up to $5,000 per return for filing a “frivolous claim” while those who submit inaccurate claims also face the risk of an audit, the agency said.

Taxpayers ‘Should Realize They’ve Been Tricked’

Meanwhile, taxpayers who knowingly file a false tax return also face potential criminal prosecution.

Individuals charged with filing a false tax return risk being sentenced to up to three years in jail and a $100,000 fine, according to the IRS.

With thousands of Americans potentially liable for up to $5,000 in fines, the IRS is asking taxpayers who incorrectly filed for these claims to submit an accurate tax return—this time without the claims they’re not eligible for—as soon as possible.

The agency also urged taxpayers who may have incorrectly filed for these claims to seek out advice from a trusted tax professional.

The IRS commissioner noted that taxpayers who filed these claims “should realize they’ve been tricked” and now face a long wait if they’re owed a refund for other things.

According to Tuesday’s consumer alert, the Fuel Tax Credit is a specialized credit designed for off-highway business and farming use.

Taxpayers who claim the credit must have a business purpose and a qualifying business activity, like running a farm or purchasing aviation gasoline, to be eligible for the credit.

“Most taxpayers don’t qualify for this credit,” the IRS said.

Elsewhere, the Sick and Family Credit was available for self-employed individuals for 2020 and 2021 during the pandemic. It is not available for 2023 tax returns.

The IRS said it has seen 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.”

Internal Revenue Service (IRS) commissioner nominee Daniel Werfel in Washington, on Feb. 15, 2023. Kevin Dietsch/Getty Images

Taxpayers ‘Inventing’ Fictional Household Employees

Finally, some taxpayers have also “invented” fictional household employees and filed the Schedule H Form 1040 in order to claim a refund based on false sick and family medical leave wages they never paid, the IRS said.

Mr. Werfel noted on Tuesday that the improper claims are being fueled by scam artists “preying on people’s hopes” and attempting to use the complexity of the tax system to convince people there are ways in which they can 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,” Mr. Werfel added.

The latest warning comes after the IRS revealed it had taken in approximately $4.7 trillion in taxes from Americans in the last fiscal year—or about 96 percent of the funding that supports the federal government’s operations—down slightly from the record $4.9 trillion it collected in the 2022 fiscal year.

That was due, in part, to the historic $79.4 billion in supplemental funding provided under the Inflation Reduction Act (IRA) of 2022, which the agency used to hire more enforcers and phone operators, and update its technology, according to the IRS’s annual Data Book for fiscal year 2023 published in April.

Elsewhere, the agency said it paid out $659 million in refunds, marking a 2.7 percent increase over the 2022 fiscal year.

Amid widespread concerns from conservatives and experts that increased funding for the IRS would result in more audits for Americans earning less than $400,000 per year, the agency noted that there was absolutely “no increase in audits of tax returns” for taxpayers making under that amount.

“This once-in-a-generation funding opportunity provided by the IRA is an investment in the transformation of the IRS and an investment in the financial future of our nation,” Mr. Werfel wrote in the agency’s annual Data Book.