The Internal Revenue Service (IRS) issued a new warning about scams through social media. The IRS has received thousands of requests for inflated tax refunds. Many of these taxpayers relied on improper or inaccurate social media claims.

There are several specific scams that are promoted on social media. These include the Fuel Tax Credit, the Sick and Family Leave Credit, false household employment taxes and overstated withholding. The improper claims often lead to delayed refunds because the IRS must hold up the return and investigate to understand if the deduction or credit is proper.

Social media is ubiquitous in American society. However, social media posts may come from individuals from foreign nations who do not understand U.S. tax rules. The IRS urges taxpayers to be cautious about social media advice. There is a social media trend toward excessive promises and claims about various types of tax credits and deductions. The challenge for individuals is that many social media comments encourage you to follow the improper tax advice. You may think, “Surely all of these supposedly expert individuals cannot be wrong.”

The IRS has specific recommendations to protect individuals from these social media fraudsters and scammers.

1. Suspicious Refund Claims — If the IRS receives tax returns with frequently false credits or deduction claims, it will hold up the tax refunds and attempt to verify the claim. This is particularly true for the Fuel Tax Credit, the Sick and Family Leave Credit for Self-Employed Individuals and overstated withholding.
2. You Receive an IRS Letter — If you receive Letter 5747c, Potential Identity Theft during Original Processing – TAC, you should follow the directions on the letter. It will generally not be helpful to visit an IRS Taxpayer Assistance Center (TAC) or contact the IRS over the phone. Each letter has specific instructions you should follow.
3. Filing a Frivolous Return — There are potential serious consequences if the IRS believes that your tax return is frivolous. If your return is not valid, you should file a complete and accurate return within 30 days. If you do not file an amended return, you could be subject to penalties of $5,000 for the improper return or asked to submit to a compliance audit with the IRS. If the abuse is serious, the IRS may initiate a criminal prosecution.
4. Fuel Tax Credit Qualification — The fuel credit is meant only for off-highway vehicles used in businesses, farms, ranches, aviation or commercial fishing. It is not available to most taxpayers.
5. Sick and Family Leave Credit — The Sick and Family Leave Credit was enacted during the COVID-19 pandemic. It was available for individuals with a trade or business and was designed to assist self-employed individuals during the pandemic. This credit was only available during 2020 and 2021. It may not be claimed on a 2022 or 2023 tax return.
6. Overstated Withholding — Another scam that is promoted in social media invites taxpayers to create fictional employees. The taxpayer then manually fills out a Form W-2, Wage and Tax Statement, and claims there was a large withholding amount. The taxpayer hopes to receive a large refund for this fraudulent withholding. The IRS verifies withholding claimed on tax returns and is likely to audit the taxpayer.

Editor's Note: During the pandemic, many credits and deductions were passed for valid reasons. However, social media scammers tend to promise far more than is authorized. Taxpayers should be on guard and use a reputable tax preparer to ensure their returns are correctly completed.

IRS Collects $1 Billion of Overdue Tax Debt

On July 11, 2024, the Department of the Treasury and the Internal Revenue Service (IRS) announced that they had received over $1 billion in past-due tax payments.

In 2023, the IRS created an initiative to pursue high-income individuals who potentially failed to pay their taxes. The program focused on taxpayers who had over $1 million in annual income and more than $250,000 in tax debt.

U.S. Secretary of the Treasury, Janet Yellen, stated the audit program "is increasing tax fairness and ensuring that all wealthy taxpayers pay the taxes they owe, just like working families do. A new initiative to collect overdue taxes from a small group of wealthy taxpayers is already a major success, yielding more than $1 billion in revenue so far.”

The initial effort by the IRS focused on 175 high-income taxpayers and collected $38 million. The IRS then hired additional staff and expanded the program to 1,600 high-income individuals. Over 1,500 cases were developed for senior IRS auditors.

During the pandemic, the IRS was faced with a shortage of auditors and the available auditors were in lockdowns. There was significantly reduced enforcement of tax payments by high-income individuals. As a result, the IRS now has announced multiple strategies to increase tax collections.

There are multiple new strategies to collect tax from wealthy individuals. One effort involves tracking the personal use of corporate jets. Another team focuses on collecting taxes from 125,000 high-income taxpayers who have failed to file tax returns for several years. There are large partnerships with assets of $10 billion or more and the IRS is auditing 76 of these partnerships. The partnerships include hedge funds, real estate partnerships and large law firms. Another effort is an audit of 60 large corporate taxpayers with average assets of $24 billion. Finally, a major tax loophole has been exploited by complex partnerships and the IRS believes the audits of these partnerships will raise over $50 billion throughout the next decade.

IRS Commissioner Danny Werfel noted, "With this collection activity, the IRS passed an important milestone in our effort to improve compliance and ensure fairness in the tax system. Our increased work in this area means these past-due tax bills from high-end taxpayers are no longer being left on the table, like they were too often in the past.”

Clean Energy Credit Scam

On July 3, 2024, the Internal Revenue Service (IRS) warned about an emerging scam that involves the sale of clean energy tax credits. The IRS has received numerous returns from tax return preparers who have improperly claimed clean energy tax credits that were purchased from another entity.

Under the Inflation Reduction Act (IRA), there were a host of new energy credits for solar, wind, biomass and other generation methods. While most credits were used by the operating organization, some entities had excess credits and were permitted to sell those credits.

The improper use of these purchased credits was generally by individuals who file IRS Form 1040. Tax preparers need to understand that purchased tax credits are subject to the passive activity rules. Therefore, the credits are available only for individuals who could offset other passive activity income. The majority of taxpayers do not have a passive income tax liability and are not qualified to use these credits.

IRS Commissioner Danny Werfel noted, "This is another example where scammers are trying to use the complexity of the tax law to entice people into claiming credits they are not entitled to. Taxpayers should be wary of promoters pushing dubious credits like this and others. The IRS is watching out for this scam, and we urge people to use a reputable tax professional before claiming complex credits like clean energy."

Editor’s Note: Tax professionals should have a thorough understanding of the passive activity rules. Taxpayers who do not have a passive activity tax liability should be cautioned to avoid purchasing the clean energy tax credits.

Applicable Federal Rate of 5.4% for July: Rev. Rul. 2024-13; 2024-28 IRB 1 (17 June 2024)

The IRS has announced the Applicable Federal Rate (AFR) for July of 2024. The AFR under Sec. 7520 for the month of July is 5.4%. The rates for June of 5.6% or May of 5.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”