IRS: Watch Out for Tax Refund Schemes That Could Land You in Hot Water

(Yahoo!Finance) - A scheme circulating on social media is encouraging Americans to claim fraudulent tax refunds by adding fake W-2s on their tax returns, the Internal Revenue Service recently warned.

Online scammers are telling taxpayers to make up fictitious income and substantial withholdings and then to enter the figures into tax-filing software to generate larger refunds, according to the IRS.

But taxpayers caught up in this trap could face financial and criminal penalties if they are caught, the IRS and experts warned.

“There are lots of potential penalties in the tax law for both intentional and unintentional errors,” Annette Nellen, CPA and professor at San Jose State University MST Program, told Yahoo Finance. “Certainly reporting a made up deduction on the return shows intent and more severe penalties can apply such as for fraud.”

One of the recommendations by these scammers include putting down an income amount that is just low enough to trigger eligibility for the Earned Income Credit. Other fraudsters are encouraging taxpayers to search online for the legitimate federal identification numbers of employers to push made-up W-2s through the system, according to one tax expert.

“Normally the thieves report a relatively small amount of income but a large amount of federal withholding with the goal of not just maximizing a refund from withholding, but also for generating income tax credits for such items as the Earned Income Tax Credit (EITC) and education credits,” Tom O’Saben, an enrolled agent and director of tax content and government relations at National Association of Tax Professionals, wrote to Yahoo Finance.

The IRS reminded taxpayers that it has partnered with the Security Summit as well as the Social Security Administration to verify W-2 forms. The Security Summit is composed of the IRS, 42 state tax agencies, and the tax community — including tax preparation firms, software developers, payroll and tax financial product processors, tax professional organizations and financial institutions.

Still, there is a lag between when fraudulent refunds are issued and when the IRS catches the fake W-2s. The matching of documents across different departments and agencies could take a while, according to O’Saben.

“The biggest problem facing the IRS is matching W-2 information submitted with a personal tax return with data submitted by employers, which is sent directly to the Social Security Administration, not the IRS.” O’Saben pointed out. “By the time matching occurs, many months have passed.”

But the repercussions can be significant if taxpayers are caught in this scam. The IRS can slap a variety of penalties, including those of $5,000 or even jail time.

For instance, in an accuracy-related penalty, the IRS would decide whether negligence or intentional disregard caused the accuracy problem, O’Saben said. Another is a substantial understatement of income tax penalty, where the understated income penalty is greater than $5,000 or 20% of the portion of the tax liability underpayment. The last penalty is filing a fraudulent return, which can result in jail time.

The IRS counseled that if anyone has already participated in this forged activity, they should amend their tax return immediately or consult with a trusted tax professional,

“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,” Doug O’Donnell, the acting IRS commissioner, wrote in the press release.

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

By Rebecca Chen · Reporter

Rebecca is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).


More Articles