On March 3, 2023, the IRS issued a consumer alert to warn taxpayers of new scams that urge people to use wage information on a tax return to claim false credits in hopes of getting a big refund. According to the agency, the scheme encourages people to use tax software to manually fill out Form W-2, Wage and Tax Statement, and include false income information to get substantial refunds based on the large amount of withholding.
Two variations of this scheme are also being seen by the IRS and both involve misusing Form W-2 wage information in hopes of generating a larger refund: The following describes the said variations:
One variation involves people using 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 a self-employed individual. These credits were available for self-employed individuals for 2020 and 2021 during the pandemic; they are not available for 2022 tax returns.
The second variation involves people making up fictional employees employed in their household and using Schedule H (Form 1040), Household Employment Taxes, to try claiming a refund based on false sick and family wages they never paid. The form is designed to report household employment taxes if a taxpayer hired someone to do household work and those wages were subject to Social Security, Medicare or FUTA taxes, or if the employer withheld federal income tax from those wages.
This and other schemes are being actively monitored by the IRS and the Security Summit partners in the tax industry and the states. The IRS is also working with payroll companies and large employers to verify W-2 information.
The IRS also emphasized that people who try to misuse Form W-2 may face a wide range of penalties including paying a frivolous return penalty of $5,000 and the risk of criminal prosecution for filing a false tax return.
Read the IRS’ news release here.