In a recent IRS Tax Tip (2023-39), a new scam has been brought to light that targets taxpayers seeking substantial refunds. Social media has become a breeding ground for these schemes, which urge individuals to manipulate wage information on tax returns to falsely claim credits, potentially resulting in large refunds. However, the IRS is actively monitoring for these scams, and participants could face severe penalties and even criminal prosecution.

Here’s how the W-2 scam works: Scammers encourage people to manually fill out Form W-2, Wage and Tax Statement, using tax software and including fabricated income and withholding figures. They then suggest creating a fictitious employer and filing the fraudulent tax return electronically. The objective is to secure a sizable refund due to the inflated withholding amount.

There are two related scams also making the rounds. One involves individuals misusing 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 rather than self-employed income. These credits were only available for self-employed individuals for 2020 and 2021 during the pandemic and are not available for 2022 tax returns.
Another variation involves creating fictional household employees and using Schedule H (Form 1040), Household Employment Taxes, to falsely claim refunds based on non-existent sick and family medical leave wages. Taxpayers typically use this form to report household employment taxes when they hire someone for household work and those wages are subject to Social Security, Medicare, or federal unemployment (FUTA) taxes, or if the employer withheld federal income tax from those wages.

The IRS, in collaboration with the Security Summit partners, the tax industry, and states, is vigilantly monitoring for these fraudulent schemes. The agency also works closely with payroll companies, large employers, and the Social Security Administration to verify W-2 information. Individuals attempting this scam may face a frivolous return penalty of $5,000 and risk criminal prosecution for filing a false tax return.

For those who have participated in one of these schemes, the IRS recommends amending their previous tax return or consulting with a trusted tax professional. Always be cautious when encountering tax-related advice on social media and rely on reputable sources such as tax professionals for accurate information.