Tax season brings tax scams like night follows day. And with all the advice circulating on the internet, it can be hard to separate the good from the bad. The IRS has recently flagged a particularly pernicious W-2 "tax hack" which encourages people to claim unearned credits and bigger tax refunds by lying about their income. Here's the breakdown of this bad idea and the legal consequences for any taxpayer unwise enough to try it.
The W-2 tax scam means lying to the IRS
The IRS is warning taxpayers about a scheme flying around on social media that advises manually altering your W-2 form to add false wage data. Scammers are advising people to invent larger-than-life withholding figures, as well as fake employers, before electronically filing the false return to obtain a giant refund. The standard deduction just isn't enough for some people, apparently.
The IRS, state tax authorities, and tax industry firms are monitoring a variety of tax schemes as Tax Day approaches. The IRS coordinates the Social Security Administration, major employers and payroll companies like ADP to review W-2 information. So if you think you can slip fake job information through the net, think again.
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Tax authorities are tracking two variants of the W-2 scheme that misuse wage info to generate a big, unearned refund.
The first type of tax scam involves filing Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. Scammers advise people to claim this credit for the income they earned as regular employees — rather than the intended self-employed taxpayers. These pandemic-specific credits are no longer available for use on 2022 tax returns, anyway. Trying to claim expired COVID emergency credits for the self-employed will certainly get your return flagged.
The second version of the W-2 scam is even more creative: advising taxpayers to make up fake household employees. Scammers recommend claiming hefty tax refunds for falsified family and for sick wages they never actually paid, using Schedule H (Form 1040), Household Employment Taxes. The form is designed to report household employment taxes if a taxpayer hired someone to do household work. It's not intended for making up fake employees and claiming unearned refunds.
Legal consequences of the W-2 scam
The IRS reminds people who try the W-2 scam, or any other tax fakery, that they face a wide range of financial and legal consequences. The most likely penalty is the frivolous return penalty, of $5,000.
An Erroneous Claim for Refund or Credit penalty could also apply. This penalty covers any claims for refunds or income tax credits for an excessive amount without reasonable cause. This could be up to 20% of the excessive amount claimed, so if you claimed a $20K refund, you would be penalized $4,000 for your false claim.
Filers also run the risk of criminal prosecution for filing a false tax return. In similar cases taken to trial, a single felony charge carried a sentence of up to three years in prison, a $100,000 monetary fine, and a year of supervised probation.
How to fix a false tax return
If you or anyone you know has participated in this W-2 scheme, the IRS recommends filing an amended tax return. You could also consider consulting a tax professional to get your ducks fully in a row.
Here's what to know about amended returns:
- If your filing deadline and available tax extensions haven't passed, file a "superseding return." If you file a second return before the filing deadline, the second return "supersedes" the first return and is treated as the original return.
- The IRS can correct most simple errors for you, but substantial income changes require an amended return.
- When filing an amended return, you'll probably need to submit IRS Form 1040X, which is used to:
- Correct Forms 1040, 1040-SR, or 1040-NR;
- Make certain elections after the election deadline;
- Change amounts previously adjusted by the IRS (except IRS changes to interest or penalties); or
- Claim a loss or unused credit carryback.
- You can electronically file amended Forms 1040, 1040-SR and 1040-NR for any tax year after 2018.
- You must file an amended tax return within three years from the date you filed your original return or within two years from the date you paid any tax due, whichever is later.
- Track the status of your amended tax return via the "Where's My Amended Return?" tool or by calling 866-464-2050.
A tax pro can offer more detailed advice on how to get right with the IRS. Look up credentialed tax preparers in your area, using resources like the IRS’s online Directory of Federal Return Preparers. Once you find a few you like, ask them directly for their credentials and consider checking their history and reputation via resources like the Better Business Bureau. Avoid tax preparers that take a percentage of your refund or refuse to sign your return before filing.
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