Misleading social media advice leads to false claims for Fuel Tax Credit, Sick and Family Leave Credit, household employment taxes; FAQs help address common questions, next[...]

FS-2024-24, July 2024

The Internal Revenue Service issued alert IR-2024-139 about a series of scams and inaccurate social media advice. Social media schemes led to thousands of inflated refund claims during the past tax season. The IRS has increased its compliance efforts related to false and/or questionable credits.

These FAQs are being issued to provide general information to taxpayers and tax professionals as expeditiously as possible. Accordingly, these FAQs may not address any particular taxpayer's specific facts and circumstances, and they may be updated or modified upon further review.

Background

The IRS warns taxpayers not to fall for these scams centered around the Fuel Tax Credit, the Sick and Family Leave Credit, household employment taxes and overstated withholding. The IRS has seen thousands of dubious claims come in where it appears taxpayers are claiming credits for which they are not eligible, leading to refunds being delayed and the need for taxpayers to show they have legitimate documentation to support these claims.

The IRS continues to urge taxpayers to avoid these scams as myths continue to persist that these are ways to obtain a huge refund. Many of these scams were highlighted during this spring's annual Dirty Dozen series, including the Fuel Tax Credit scam, bad social media advice and "ghost preparers."

The IRS reminds taxpayers to keep these important points in mind:

• Social media can connect people and information from all over the globe. Unfortunately, sometimes people provide bad tax advice that can lure good taxpayers into trouble.
• The IRS warns taxpayers to be wary of trusting internet advice, whether it's a fraudulent tactic promoted by scammers or a deliberately false tax-related scheme trending across popular social media platforms.
• The IRS is aware of various filing season hashtags and social media topics related to this fraudulent information. These generally involve people trying to use legitimate tax forms for the wrong reason.

General information

Q1. What happens when the IRS identifies suspicious refund claims? (added July 8, 2024)

A1. Some taxpayers may receive a letter 5747C and/or 4883C/5071C with instructions to verify their identity and tax return information so we can continue processing their tax return. Even after this verification, questionable refunds will continue to be held until credit eligibility is verified. Examples of frequently abused claims include:

• Fuel Tax Credit (Form 4136).
• Sick and Family Leave Credit for Self Employed Individuals (Form 7202).
• Overstated withholding.
• Schedule H, Household Employment Taxes including Qualified Sick Leave Wages.

Q2. What should you do if you receive one of these letters from the IRS, identifying your tax return as requiring authentication and/or being potentially frivolous? (added July 8, 2024)

• 3176C Frivolous correspondence response.
• 5747C Potential identity theft during original processing - TAC.
• 5071C Potential identity theft during original processing with online option.
• 4883C Potential identity theft during original processing.

A2. Taxpayers in receipt of a 3176C letter should follow the directions on the correspondence. Taxpayers receiving these letters may have previously received a 5747C letter, 5071C letter or 4883C letter. In this instance, disregard the 5747C, 5071C or 4883C. Do not visit a Taxpayer Assistance Center (TAC) or try to authenticate online or over the phone. Instead, follow the directions in the 3176C letter.

Q3. What actions are needed to avoid legal consequences? (added July 8, 2024)

A3.

• File a complete and accurate return within 30 days of receiving the IRS letter or notice. This may include submitting an amended tax return for each taxable period where an inappropriate claim was filed.
• If applicable, attach the IRS letter received (such as, 3176C) to your corrected return and mail it to the address listed on the correspondence.

Q4. What are the legal consequences for filing a frivolous return? (added July 8, 2024)

A4.

• Penalties
  • Claims and filings that are based upon a position identified as frivolous by the IRS -or- reflect a desire to delay or impede tax administration are subject to the Internal Revenue Code (IRC) 6702(a) penalty. This penalty is $5,000 for each return (or copy of return) claiming an improper credit as defined above. The penalty is assessed against each spouse on a married filing joint return. (Notice 2010-33)
• Compliance audit
  • Uncorrected frivolous claims may be subject to a compliance audit. Taxpayers may be contacted by an Examination Function and asked to provide documentation related to the claim. The taxpayer will be required to verify eligibility for the credit under the law.
• Criminal prosecution
  • Individuals or preparers who knowingly file false income tax returns may face fines and be subject to criminal prosecution and imprisonment.

Q5. What is the Fuel Tax Credit? (added July 8, 2024)

A5. The Fuel Tax Credit is a tax credit claimed for various non-taxable use of fuel. It is meant for off-highway business, farming, aviation and commercial fishing use. As such, it is not available to most taxpayers. Taxpayers may be asked to provide specific documentation on their occupation and fuel receipts to verify eligibility.

Q6. What happens if you fall victim to a Fuel Tax Credit scam? (added July 8, 2024)

A6. If you claim an amount of Fuel Tax Credit that is disproportionate to the income reported on the return or file a claim reflecting an impossible quantity of fuel for the occupation reported, you are subject to an IRC 6702(a) penalty of $5,000 for each return claiming an improper credit. For additional information, refer to Instructions for Form 4136.

Q7. What is the Sick and Family Leave Credit for self-employed individuals? (added July 8, 2024)

A7. The Sick and Family Leave Credit wasenacted in March 2020, the Families First Coronavirus Response Act (FFRCA) intended to help the United States combat COVID-19 by providing small and midsize employers refundable tax credits that reimburse them, dollar-for-dollar, for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19. The FFCRA also created equivalent refundable sick and family leave credits for self-employed individuals based on the individual's average daily self-employment income and a specified number of days during the tax year that an individual was unable to perform services as a self-employed individual due to reasons related to COVID-19.

To be eligible, taxpayers must:

• Have a trade or business as defined in IRC 1402. Generally, self-employment income is a result of the performance of personal services that cannot be classified as wages because an employer-employee relationship does not exist between the payer and the payee.
• Claim only the eligible number of days or wages, but no more than the amount allowed by law.
• Claim the credit based on qualifying self-employed income, but no more than allowable by law.

Q8. What are the two primary variations of the Sick and Family Leave Credit scheme? (added July 8, 2024)

A8.

Q9. What is the overstated withholding scam? (added July 8, 2024)

A9. The overstated withholding scam is a recent scheme circulating on social media encouraging people to use tax software to manually fill out a Form W-2, Wage and Tax Statement, or other information returns, for example Form 1099-NEC or other Form 1099s listed below, to include false income and withholding information. In this overstated withholding scheme, scam artists suggest people make up large income and withholding amounts as well as the fictional employer supplying those amounts. Scam artists then instruct people to file the bogus tax return electronically, in hopes of getting a substantial refund due to the large amount of fraudulent withholding.

The IRS verifies the withholding claimed on tax returns. If the IRS cannot verify the wages, income or withholding credits entered on the tax return, the tax refund will be held pending further review. Taxpayers should always file a complete and accurate tax return. Utilize legitimate information returns, such as Form W-2 issued from an employer, to complete returns correctly.

There are multiple variations of the overstated withholding credit scheme, including but not limited to the following forms or schedules:

• Forms W-2 and W-2G.
• Forms 1099-R, 1099-NEC, 1099-DIV, 1099-OID and 1099-B.
• Alaskan Dividend Fund, Schedule K-1 with Withholding Reported, and Unspecified Source of Withholding Credit Claimed.

Additional details on these frequently asked questions

Because these FAQs have not been published in the Internal Revenue Bulletin, they will not be relied on or used by the IRS to resolve a case. Similarly, if an FAQ turns out to be an inaccurate statement of the law as applied to a particular taxpayer's case, the law will control the taxpayer's tax liability.

Nonetheless, a taxpayer who reasonably and in good faith relies on these FAQs will not be subject to a penalty that provides a reasonable cause standard for relief, including a negligence penalty or other accuracy-related penalty, to the extent that reliance results in an underpayment of tax. Any later updates or modifications to these FAQs will be dated to enable taxpayers to confirm the date on which any changes to the FAQs were made. Additionally, prior versions of these FAQs will be maintained on IRS.gov to ensure that taxpayers, who may have relied on a prior version, can locate that version if they later need to do so.

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