IRS Warns of New Tax Scam That Tempts Innocent Taxpayers Into Becoming Criminals
IRS Warns of New Tax Scam That Tempts Innocent Taxpayers Into Becoming Criminals

By Tom Ozimek

The Internal Revenue Service (IRS) has issued a warning to taxpayers to be on guard for a new scam that promises huge refunds if they misuse wage information or claim false credits on tax returns, potentially leading them to face criminal liability.

There are several variations of the scheme, but all involve misusing wage information on Form W-2, Wage and Tax Statement, in hopes of getting a massive refund—sometimes as much as five figures.

Scammers, who are pushing the new scheme on social media, encourage taxpayers to use tax software to manually fill out Form W-2 and then instruct them to include false income information with the promise of getting a big refund, according to the IRS alert.

In one scheme, scam artists encourage taxpayers to make up large income and withholding figures, and provide fake employer data. The criminals tempt taxpayers with the promise of getting a big refund owing to the large amount of withholding.

“We are seeing signs this scam is increasing, and we worry that innocent taxpayers could be at risk of being tempted into falling into a trap that puts them at risk of financial and criminal penalties,” Acting IRS Commissioner Doug O’Donnell said in a statement.

A variation on the scheme involves scam artists encouraging people to use Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, to claim a credit based on income earned as an employee and not as someone who’s self-employed. These credits were temporarily available for self-employed individuals on 2020 and 2021 tax returns but are not available any longer.

Another variation involves taxpayers being encouraged to make up fictional employees in their household and provide false information on Schedule H (Form 1040), Household Employment Taxes, in a bid to claim a refund based on false sick and family wages that they never paid.

Taxpayers who fall for the scam and submit a bogus tax return with false information face a wide range of penalties, the IRS warned. This could include a $5,000 frivolous tax return penalty or even criminal prosecution.

“There is no secret way to get free money or a big refund. People should not make up income and try to submit a fraudulent tax return in hopes of getting a huge refund,” O’Donnell cautioned.

The IRS recommends that people who have participated in one of the schemes amend a previous tax return or consult with a tax professional for a course of action.

Failure to Meet Certain Tax Obligations

In an earlier alert, the IRS issued a reminder to taxpayers regarding their reporting and tax obligations on income from the so-called “gig economy,” service industry tips, digital assets transactions, and foreign sources.

The gig economy is defined as activities that people earn income from providing on-demand goods, services, or work—which often take place by way of an online platform such as an app or a website like Instacart, DoorDash, or Uber.

Taxpayers are obligated to report income from the gig economy on their tax returns, “even if the income is from part-time, temporary, or side work; paid in any form, including cash, property, goods or digital assets; not reported on an information return form like a Form 1099-K, 1099-MISC, W-2, or other income statement,” the IRS said in the notice.

People who work in restaurants, hotels, salons, and similar industries and who regularly receive tips also have to report those payments, according to the IRS.

Both cash tips and noncash tips—defined as items of value such as passes, tickets, or goods and commodities given to the employee—must be reported on tax returns.

The IRS also said that taxpayers have to report their foreign source income regardless of where they live.

Both American citizens and resident aliens or those who hold green cards “must report unearned income, such as interest, dividends, and pensions from sources outside the United States unless exempt by law or a tax treaty.” They also must report earnings from sources outside the United States.

“They’re also subject to the same income tax filing requirements that apply to U.S. citizens or resident aliens living in the United States,” the IRS stated.

The agency noted that federal law requires Americans to report their worldwide income, such as earnings from foreign trusts and foreign bank accounts.

Jack Phillips contributed to this report.

USNN World News (USNN) USNN World News Corporation is a media company consisting of a series of sites specializing in the collection, publication and distribution of public opinion information, local,...