Federal tax credits are designed to reduce tax burdens for certain expenses, and there are many potential tax credits for which a person or business may be eligible.
Unfortunately, there is also a lot of misinformation floating around when it comes to who is eligible for these credits and how much can be claimed. In fact, there have been instances of scams, where well-meaning taxpayers have been tricked into claiming credits for which they do not actually meet eligibility requirements.
Such occurrences have been prevalent during the 2024 tax season, underscoring the importance of taxpayers remaining vigilant and well-informed.
In May of 2024, the IRS issued a consumer alert to inform taxpayers about a series of scams that have reportedly led thousands of taxpayers to file fraudulent credit claims on their tax returns. These scams come in many forms and target various taxpayers including, but not limited to, individuals, businesses, senior citizens, car dealers and sellers, and even charitable organizations.
Scam artists often pose as tax professionals to convince taxpayers they are eligible for these credits as a means of charging them for tax guidance or return preparation. In many cases, taxpayers were led to believe they were eligible for these credits by so-called “ghost preparers” posing as tax professionals. A “ghost preparer” is someone who doesn’t sign tax returns they prepare.
In other cases, social media posts were circulated that led people to believe they were eligible for credits when, in reality, they did not meet the eligibility requirements and did not have proper documentation to support their claims.
Some of the most common tax credits that seem to be involved in these scams include the fuel tax credit, credits for sick and family leave, and the employee retention credit. Other scams targeted the clean energy tax credit, household employment taxes, natural disasters, and pandemic-related scams.
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For those who have fraudulently claimed these credits without proper documentation or cause, the ramifications could be severe. Currently, the IRS is freezing tax refunds for taxpayers who have mistakenly filed these claims. Unfortunately, this means that even well-meaning taxpayers who were scammed could have their tax refunds frozen indefinitely. Affected taxpayers will need to follow some very specific steps to resolve the issue and avoid potential fines or penalties.
For taxpayers who have recently claimed any of these credits and are wondering whether they are affected, the first thing to keep in mind is that the IRS is notifying all taxpayers whose refunds have been frozen. Note that the IRS never initiates contact via text messages or social media. The IRS may call, email, or set up an in-person meeting. However, these types of communication from the IRS are typically always preceded by a letter mailed to the taxpayer’s address on file. In other words, taxpayers likely do not need to worry unless they have received a letter directly from the IRS.
For those who are affected, this letter should explain what steps need to be taken to resolve the issue. This typically will include sending in additional documentation—although, in many cases, taxpayers will not have this documentation because they were not actually eligible for the credit(s) in the first place.
If this is the case, it may be necessary for taxpayers to amend their returns and remove the credit claims. Failure to file an amendment and follow the instructions on the IRS letter could result in hefty penalties and interest. It is also worth noting that taxpayers who need to amend returns or who file suspected fraudulent returns could be more likely to be audited.
As part of the return amendment process, taxpayers may also need to go through an identity authentication process. This usually includes a simple verification of the taxpayer’s identity in the form of a driver’s license or other ID. Once the verification step is completed, the amended return process can proceed.
For those who have already filed returns and have claimed these credits, now is the time to make sure documentation is available to substantiate these claims. If not, then there is a chance that these taxpayers may have been victims of this scam. Action needs to be taken quickly upon receiving an IRS notification to mitigate penalties and audits as much as possible.
This situation can be stressful and complex, which is why it is so important to consult with an experienced and legitimate tax professional when filing an original or amended tax return. An experienced tax professional can help taxpayers receive the guidance they need in filing their taxes correctly the first time while claiming any and all credits to which they are eligible.
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