Thousands of taxpayers in metro Detroit and elsewhere are dealing with the ugly fallout from some truly awful tax advice during the past tax season. Tax refunds remain in limbo. IRS letters are piling up, including demands that individuals verify their identities. Many will need to file amended 2023 returns to clear up the chaos.
And some will need to pay back generous refund cash that they got when they wrongly claimed dubious tax breaks touted by shady preparers.
Many people now aren’t getting the actual tax refund money they’re owed — or the extra refund cash from the wrongly claimed tax credits — until things are straightened out, as the IRS has flagged questionable returns.
How shady tax preparers used key credits to try to inflate refunds
On Tuesday, the IRS acknowledged that “thousands of taxpayers” filed inflated refund claims during the past tax season. Some of these taxpayers expected tax refund jackpots that amounted to five figures.
Typically, tax filers didn’t come up with these wild ideas on their own. Shady tax preparers seemed to be spreading these schemes like wildfire this tax season. Maybe, the tax filer listened to a friendly face in the neighborhood who worked with some preparer who promised to get them $10,000 or $20,000 or more in extra refund cash. The filers either got it wrong, trusted the wrong preparer, or knowingly tried to scam the system.
“Scam artists constantly prey on people’s hopes and try to use the complexity of the tax system to convince people there are secret ways to get a big refund,” IRS Commissioner Danny Werfel in a statement Tuesday.
Possible signs of these complex tax headaches cropped up a month ago. After the IRS flagged trouble, many taxpayers received a letter asking them to verify their identity, if they claimed certain questionable tax credits. Some might have rushed to IRS offices to verify that identity in order to free up frozen refunds.
Some troubled taxpayers lined up in April
Chaotic lines where hundreds of taxpayers stood outside of IRS buildings for hours at special Saturday events held on April 13 at a variety of IRS Taxpayer Assistance Centers across the country, including Detroit, Atlanta, Houston, and Miami, according to local TV station reports and videos on social media.
Many people told camera crews on the scene that they went to the IRS centers to get help after receiving letters to verify their identities. Many ended up angry that they got nowhere in light of the overwhelming turnout. The Houston office, for example, closed early April 13 because a fight broke out, according to Fox 26 Houston.
Tempers flared outside the IRS building in Houston “as hundreds of people trying to file their taxes and get identity verification were turned away,” according to the Houston TV station.
The IRS wasn’t offering to prepare returns at these events. But instead offered no-appointment-necessary hours on a Saturday to solve other problems. Other Saturday events in the past didn’t generate such massive turnouts.
The IRS alert Tuesday noted that these taxpayers who wrongly claimed key credits, including a fuel-related credit, do not need to visit a Taxpayer Assistance Center to verify their identity. You wouldn’t go to the center to amend your return, either. The IRS has another no-appointment Saturday event scheduled to address other issues from 9 a.m. to 4 p.m. May 18 in several cities, including the Detroit office at 477 Michigan Ave.
More: Tax pros warned that ‘new client’ could be a scammer, as crooks seek sensitive data
IRS is sending other notices
Taxpayers with questionable returns might be confused by another type of letter from the IRS, which asks them to provide proof that that they qualify for the very specific tax credits. These letters are dubbed “IRS Notice 3176c” and apply to potentially frivolous tax returns, which include incorrect claims for fuel tax credits, sick and family leave credits, and household employment taxes.
“Taxpayers who verified their identity in-person may receive these letters,” the IRS said Tuesday. “Taxpayers who haven’t verified their identity yet and receive one of these letters asking for additional documentation should follow the advice on the most recent letter.”
Luis Garcia, a spokesperson for the IRS in Detroit, said tax filers who got caught up in these “secret” tax techniques need to amend their returns as soon as possible to avoid future tax trouble.
Taxpayers must file an amended return to remove false claims for these credits to avoid potential penalties.
Typically, the IRS sends out letters asking people to verify their identity when the IRS believes a bad actor filed a return to steal refund cash using someone’s ID. If you filed the return, you don’t need to verify your identity.
“If you got a letter from us asking to verify your identity and you know it is incorrect, do not visit a Taxpayer Assistance Center,” Garcia said. “Amend your tax return to remove the improperly claimed credit.”
One clue that you’ve got bad advice: See if the tax preparer actually signed that return. Fraudsters aren’t signing these returns.
“Regardless of whether you are a victim or knowingly participate in the fraud, remember that you, the taxpayer, are responsible for what is on the tax return you signed,” Garcia said.
Social media claims fueled the frenzy
Much of the tax fraud frenzy this tax season appears to have been cooked up on social media.
“Scam artists and social media posts have perpetuated a number of false and misleading claims that have tricked well-meaning taxpayers into believing they’re entitled to big, windfall tax refunds,” Werfel said.
The IRS warned taxpayers that they might have been “scam victims” if they filed for big refunds based on misleading advice relating to the key frequently misused tax breaks.
The IRS, Werfel said, spotted many bad claims during its fraud review process, including returns claiming the fuel tax credit, the sick and family leave credit, and household employment taxes.
Taxpayers now, Werfel said, are looking at an “extensive review process and a long potential wait if they’re owed a refund for other things.”
Many taxpayers already trying to amend returns
It’s an unsettling time for many taxpayers, including lower income households, when the overall tax season seemed to go fairly smoothly for many people.
Angela Aaron-Benifield, director of financial mobility services for the Wayne Metropolitan Community Action Agency, which offers free tax help services to lower income households, said some local taxpayers have already sought help to get their 2023 returns amended after the IRS notified them that their tax returns contained improperly applied tax credits. The taxpayers ran into trouble with returns filed by paid preparers elsewhere.
But Aaron-Benifield said the agency couldn’t prepare the amended returns since the original return wasn’t prepared by the Wayne Metro volunteer tax program. Instead, the tax filers needed to go back to the original preparer or turn to another tax professional for help. The Wayne Metro tax service program completed 2,138 tax returns from Oct. 1, 2022, through April 30. The service is available year round. See www.waynemetro.org/taxes for information.
Volunteer sites offer free tax help for those filers who generally make $64,000 or less.
Through much of the tax season, the IRS warned that dubious tax advice was exploding online, including videos on TikTok.
Back in March, the IRS highlighted spike in wrongly claimed fuel tax credits, which are meant for off-highway business and farming use. You’re not getting this credit for driving to your job or hauling the kids to school.
Unscrupulous tax return preparers inflated refunds by erroneously claiming the fuel tax credit by filing Form 4136, Credit for Federal Tax Paid on Fuels.
“Promoters are pushing the accelerator on bad Fuel Tax Credit claims and driving honest taxpayers to a bad choice,” Werfel said when mentioning the credit among the “Dirty Dozen” list of scams in early April.
Shady preparers charge taxpayers inflated fees, direct huge chunks of the tax refund to themselves, and steal key information, like Social Security numbers, that can be used in a variety of ID theft schemes.
“While the scammers drive away with the fees, the taxpayers are left behind with a bad claim and all the risk and responsibility to make it right,” Werfel said. “Taxpayers must remain cautious and seek out a reputable tax professional rather than a reckless promoter.”
The IRS said it had implemented new identity theft screening filters and processing systems that were “stopping a significant number of suspicious fuel tax credit refund claims.”
Back in early March, the IRS highlighted a scam that involved fraudulently filing Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. This unique credit was available for self-employed individuals for 2020 and 2021 during the pandemic only. It’s not a credit that anyone can claim on a 2023 tax return.
Another scam involved people making up fictional employees hired to do work in their household. That scam would improperly file Schedule H, Household Employment Taxes as part of the return.
Don’t ignore one of these IRS letters, if you receive them. Review the exact guidelines for any of these unique credits, if you claimed them. Talk to a trusted tax preparer, not the tax clown who encouraged you to file a false claim.
People who don’t qualify for these credits risk facing a penalty of up to $5,000 per return for filing a frivolous claim. The IRS said returns filed by individuals and tax preparers who knowingly claim a credit to which they are not entitled “may face fines and even be subject to federal criminal prosecution and imprisonment.”
Unfortunately, some people who haven’t filed their 2023 returns yet could still be scammed, so it’s key to pay attention to these alerts.
Some Michigan taxpayers hit by severe storms last August have been able to wait until June 17, instead of April 15, to file various federal individual and business tax returns and make tax payments.
The tax relief applies to any area designated by the Federal Emergency Management Agency, including Eaton, Ingham, Ionia, Kent, Livingston, Macomb, Monroe, Oakland, and Wayne counties. Individuals and households that reside or have a business in these localities qualify for tax relief.
If you haven’t filed a 2023 tax return yet, carefully review any heavily promoted credits, and don’t claim them if you don’t qualify. You won’t get an extra-large sized refund, instead you’ll be triggering super-sized tax headaches.
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X (Twitter) @tompor.