Although the IRS has issued numerous warnings to taxpayers regarding tax scams involving tax credits and inaccurate tax advice posted on social media, thousands of taxpayers filed tax returns this tax season claiming inflated tax refunds. The IRS has issued a warning that taxpayers who have claimed these credits are required to follow specific steps to prove their eligibility for the claimed credits. Any refund claimed on the return will be frozen until eligibility for the credit is determined. Any refund to which the taxpayer may be rightfully entitled, despite the claimed credit, will also be frozen.

The IRS will first require the taxpayers to verify their identity and to confirm that they actually filed the return in question and qualify for the credit. There have been instances where a tax return preparer misled the taxpayer into claiming the credit. A tax preparer who did not sign the tax return indicates to the IRS that the taxpayer was misled by an unscrupulous tax preparer. Once the taxpayer’s identity is verified, the IRS may allow the taxpayer to amend the return to remove the claimed credit if the credit was improperly claimed.

The IRS warns that taxpayers who do not qualify for the claimed credits and fail to amend their returns, risk the imposition of a penalty of up to $5,000 for filing a frivolous return and of being audited. Taxpayers who knowingly filed a false return may also face criminal prosecution.

The IRS warning involves the use of legitimate tax provisions in situations to which they do not apply. The most common scams which have been used this tax season are:

1. Fuel Tax Credit: In order to claim this credit, the taxpayer must have a qualifying business activity such as running a farm or purchasing gasoline for aviation purposes. The IRS has found that most taxpayers claiming the credit did not qualify for the credit.

2. Sick Leave and Family Leave Credits: This credit was available to self-employed individuals for the 2020 and 2021 tax years who were unable to work during a specific period of time because of COVID or because they were caring for a family member who contracted COVID. The IRS has found that many taxpayers claimed the credit even though they were employees and not self-employed, and in years for which the credit was not available.

3. Household Employment Taxes: Taxpayers have reported fictional household employees on their return and then claimed a refund for sick and family medical leave wages they never actually paid.

Now is the time to avoid civil penalties, a potential audit and criminal prosecution. Review your 2023 return to make sure that you can fully substantiate eligibility for all credits and deductions claimed on the return. If you find that you are not eligible, then you may want to consider amending the return.