IRS Responds to Series of Scams Promoted on Social Media Sites:

There are several scams centered around the Fuel Tax Credit, the Sick and Family Leave Credit and household employment taxes which are being promoted on social media sites, particularly TikTok. 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 IRS is also seeing a new scam regarding overstated withholding.

Problem claims involve Fuel Tax Credit, Sick and Family Leave Credit, household employment taxes

The IRS has identified three common themes that continue to pop up among these bad refund claims. They involve legitimate tax provisions, but they are limited to very specialized situations. The vast majority of the related claims coming in do not qualify:

• Fuel Tax Credit: This specialized credit is designed for off-highway business and farming use. Taxpayers need a business purpose and a qualifying business activity such as running a farm or purchasing aviation gasoline to be eligible for the credit. Most taxpayers don’t qualify for this credit.
• Credits for Sick Leave and Family Leave: This specialized credit is available for self-employed individuals for 2020 and 2021 during the pandemic; the credit is not available for 2023 tax returns. 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.
• Household employment taxes: Taxpayers “invent” fictional household employees and then file Schedule H (Form 1040), Household Employment Taxes, 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.”

General information

Q1. What happens when the IRS identifies suspicious refund claims?

A1. Some taxpayers may receive a letter 5747C and/or 4883C/5071C with instructions to verify their identity and tax return information so we can continue processing their tax return. Even after this verification, questionable refunds will continue to be held until credit eligibility is verified. Examples of frequently abused claims include:

• Fuel Tax Credit (Form 4136).
• Sick and Family Leave Credit for Self Employed Individuals (Form 7202).
• Overstated withholding.
• Schedule H, Household Employment Taxes including Qualified Sick Leave Wages.

Q2. What should you do if you receive one of these letters from the IRS, identifying your tax return as requiring authentication and/or being potentially frivolous?

• 3176C Frivolous Correspondence Response.
• 5747C Potential Identity Theft during Original Processing – TAC.
• 5071C Potential Identity Theft during Original Processing with Online Option.
• 4883C Potential Identity Theft During Original Processing.

A2. Taxpayers in receipt of a 3176C letter should follow the directions on the correspondence. Taxpayers receiving these letters may have previously received a 5747C letter, 5071C letter or 4883C letter. In this instance, disregard the 5747C, 5071C or 4883C. Do not visit a Taxpayer Assistance Center (TAC) or try to authenticate online or over the phone. Instead, follow the directions in the 3176C letter.

Q3. What actions are needed to avoid legal consequences?

A3.

• File a complete and accurate return within 30 days of receiving the IRS letter or notice. This may include submitting an amended tax return for each taxable period where an inappropriate claim was filed.
• If applicable, attach the IRS letter received (such as, 3176C) to your corrected return and mail it to the address listed on the correspondence. 

Q4. What are the legal consequences for filing a frivolous return?

A4.

• Penalties
  • Claims and filings that are based upon a position identified as frivolous by the IRS -or- reflect a desire to delay or impede tax administration are subject to the Internal Revenue Code (IRC) 6702(a) penalty. This penalty is $5,000 for each return (or copy of return) claiming an improper credit as defined above. The penalty is assessed against each spouse on a married filing joint return. (Notice 2010-33)
• Compliance audit
  • Uncorrected frivolous claims may be subject to a compliance audit. Taxpayers may be contacted by an Examination Function and asked to provide documentation related to the claim. The taxpayer will be required to verify eligibility for the credit under the law.
• Criminal prosecution
  • Individuals or preparers who knowingly file false income tax returns may face fines and be subject to criminal prosecution and imprisonment.

Q9. What is the Overstated Withholding scam?

A9. The Overstated Withholding scam is a recent scheme circulating on social media encouraging people to use tax software to manually fill out a Form W-2, Wage and Tax Statement, or other information returns, for example Form 1099-NEC or other Form 1099s listed below, to include false income and withholding information. In this Overstated Withholding scheme, scam artists suggest people make up large income and withholding amounts as well as the fictional employer supplying those amounts. Scam artists then instruct people to file the bogus tax return electronically, in hopes of getting a substantial refund due to the large amount of fraudulent withholding.

The IRS verifies the withholding claimed on tax returns. If the IRS cannot verify the wages, income or withholding credits entered on the tax return, the tax refund will be held pending further review. Taxpayers should always file a complete and accurate tax return. Utilize legitimate information returns, such as Form W-2 issued from an employer, to complete returns correctly.

There are multiple variations of the overstated withholding credit scheme, including but not limited to the following forms or schedules: