IRS Warns Thousands of Taxpayers They Could Face Jail Time

The IRS is warning that thousands of taxpayers may be facing jail time if they’re found to have filed false returns for artificially high refunds.

The agency on Tuesday issued an alert saying that thousands of taxpayers fell victim to tax scams and inaccurate social media advice leading to inflated refund claims.

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Most often, taxpayers claim tax credits for which they are not eligible, possibly triggering delayed refunds and extra verification. If the verification doesn’t pan out, taxpayers could face steep financial penalties or even up to three years in jail.

If you suspect you might have made mistakes in filing or committed a false claim, you should talk to a legitimate tax preparer and decide whether you need to file an amended return to remove any ineligible claims.

A 1040 U.S. tax return is pictured on April 15 in North Haledon, New Jersey. The IRS is warning that thousands of taxpayers could face financial penalties or jail time.

Michael Bocchieri/Getty Images

“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,” IRS Commissioner Danny Werfel said in a statement. “These bad claims have been caught during our fraud review process. Taxpayers who filed these claims should realize they’ve been tricked, and they face an extensive review process and a long potential wait if they’re owed a refund for other things.”

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Two of the most common problem claims for this year arrived courtesy of the Fuel Tax Credit and the Sick and Family Leave Credit.

The Fuel Tax Credit was designed for off-highway business and farming use. Taxpayers who qualify would need a business purpose, like running a farm or purchasing aviation gasoline, to be eligible, so the vast majority of taxpayers do not meet this criteria.

The Sick Leave and Family Leave Credit was available to self-employed workers in 2020 and 2021. Despite not being viable for 2023 tax returns, the IRS reported many taxpayers incorrectly using Form 7202 to claim the credit.

“We’re seeing a record amount of scams targeting taxpayers, and the unfortunate results could end up costing those receiving refunds time, money, and much more,” Alex Beene, financial literacy instructor at the University of Tennessee at Martin, told Newsweek. “Various tax credits that help boost a refund make the rounds on social media, taxpayers pick up on the idea and file using the advice, and the IRS has to sort through claims that are incorrectly reported.”

Some taxpayers have also invented fictional household employees to then file the Schedule H Form 1040. That form allows you to claim a refund based on false sick and family medical leave wages they never paid.

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“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.”

Before seeking financial and legal consequences, the IRS generally freezes refunds for taxpayers who falsely filed for these credits. The IRS will then send a letter asking for additional information.

Taxpayers who legitimately qualify for the credits should be able to submit additional documentation and receive their rightful refunds. But if you don’t, and choose not to amend your tax return, you could have to pay up to $5,000 per return for filing a frivolous claim.

Beene said many taxpayers can avoid these issues if they follow the advice of a tax adviser or go through any of the basic guidance from most virtual tax prep software services.

“Ignore the trendy credits on social media you may see, because most apply to business circumstances, not those of personal tax filers,” Beene said. “Most importantly, if you find yourself in a situation where you inaccurately reported something, it’s important to work with the IRS to clear up any inconsistencies immediately. It’s pivotal the IRS understands this was an unintentional error and not one meant to take advantage of the tax code to get a larger refund.”