Every year, people from all walks of life find themselves tangled up in tax schemes, sometimes by accident, following bad advice, or chasing a refund that isn’t really theirs.
The truth is, the IRS is stepping up its game. With new technology and tougher enforcement, even a small mistake or a risky shortcut can turn into a huge problem.
If you’re just trying to file your taxes, worried about a letter from the IRS, or thinking about a “quick fix” you saw online, this is the time to pay attention.
This blog breaks down the tax fraud schemes that can ruin your year or your life. Knowing what to avoid and how to protect yourself from a situation you are stuck in but not responsible for can make all the difference. With the help of a civil and criminal tax attorney in Washington, DC, who serves clients nationwide and expatriates, you can steer clear of serious legal and financial trouble.
Let’s see how.
What Are Tax Fraud Schemes?
Tax fraud schemes are tricks or dishonest actions that people or businesses use to cheat on their taxes. In simple terms, tax fraud happens when someone intentionally lies or leaves out information on their tax return or other tax documents to pay less than what they owe.
This could mean not reporting all of your income, claiming deductions or credits you don’t actually qualify for, or using fake information like a made-up Social Security number.
The key term here is intentional. Tax fraud is not making a mistake or misunderstanding the rules. It’s about knowingly breaking the law to avoid paying taxes.
The government takes tax fraud seriously, and getting caught can lead to big fines or even jail time.
5 Common Tax Fraud Schemes That Could Land You in Jail
When it comes to tax fraud, certain schemes show up year after year. Tax authorities know these moves well, and they actively look for them. Getting caught doesn’t just mean paying a fine. Jail time is a real possibility; it happens more often than many people realize.
Here’s what stands out about each scheme, what the IRS is watching for, and the real risks involved.
1. Overstated Withholding Scheme
Overstated withholding is one of the most common tax fraud schemes flagged by the IRS year after year. The way it works is: someone fills out tax forms, like a W-2 or 1099, with fake income numbers and made-up withholding amounts. The goal is to trick the IRS into sending a refund that isn’t actually owed.
The IRS is not in the dark →
Their data-matching technology checks every return against employer records. When something doesn’t add up, the IRS puts the refund on hold and starts a deeper review.
This can mean:
- Major delays in getting any refund
- Audits and requests for more documents
- Possible criminal investigation
Keep in mind that the IRS lists this scheme on its annual “Dirty Dozen 2025” list of top tax fraud threats. The agency treats these cases as a high priority, and people have faced criminal charges for participating. Filing a false tax return is a felony, and the penalties can include thousands of dollars in fines and even prison time.
| 📍 Highlight: This scheme has picked up steam online, especially on social media. Posts and videos have been circulating that show people how to invent large income and withholding amounts on a range of tax forms, including Forms W-2, W-2G, 1099-NEC, 1099-R, 1099-DIV, 1099-OID, and 1099-B. These social media tutorials often encourage people to create fake employers and submit fraudulent electronic tax returns, all in an attempt to secure a large refund by artificially inflating reported tax withholdings. |
2. Improper Household Employment Taxes
Improper household employment tax schemes have become a serious focus for the IRS. This fraud involves inventing fake household employees, like a nanny or caregiver who doesn’t actually work for you, and then filing for credits or refunds based on wages that were never paid.
The most common way this is done:
- Filing Schedule H (Form 1040), Household Employment Taxes, along with your tax return.
- Listing made-up employees and reporting wages that don’t exist.
- Claiming sick or family leave credits based on these fictional wages.
3. False Fuel Tax Credit Claims
Claiming the fuel tax credit without actually qualifying is a scheme that shows up on the IRS Dirty Dozen list year after year. The fuel tax credit is only available for off-highway business and agricultural use, making it unavailable to the vast majority of taxpayers. Still, some taxpayers try to boost their refunds by claiming this credit on their tax returns, sometimes with help from promoters, including people on social media, or tax preparers who push these false claims for a fee. Filing a knowingly false tax return is tax fraud, a felony with potential prison time.
4. Fake Charities
Fraudulent charities are a recurring issue, often becoming more prevalent during times of crisis or natural disasters. Scammers create these sham organizations to exploit people’s generosity, aiming to collect both money and personal information, which can later be used for identity theft and other forms of fraud.
Taxpayers who donate money or goods may be eligible to claim a deduction on their federal tax return if they itemize deductions. However, these charitable contributions are only deductible if they are made to qualified, IRS-recognized tax-exempt organizations.
Establishing or contributing to fake charities and then claiming deductions is illegal. Intentionally taking part in or helping to carry out fraudulent charitable schemes can result in serious charges, including wire fraud, mail fraud, and tax fraud.
5. Spear Phishing Scam Targeting Tax Professionals (New Client Scams)
The IRS continues to report an increase in the “new client” scam, where cybercriminals use spear phishing tactics to target tax professionals. Cybercriminals are targeting accountants and tax preparers by pretending to be potential new clients. When the professional responds, the fraudster follows up with a malicious link or attachment. The goal is to trick professionals into opening malicious links or attachments designed to infect the computer system and give the attacker access to sensitive client data. Stealing someone’s identity to file fraudulent tax returns is illegal. Identity theft and wire fraud are federal crimes with severe penalties.
Practical Tips to Stay Safe and Avoid Tax Issues
- Review Your Tax Return Carefully: Take a moment to double-check your tax return for accuracy and honesty. Make sure Social Security Numbers (SSN), Taxpayer Identification Numbers (TIN), and Employer Identification Numbers (EIN) are correct, all income is reported, and deductions are legitimate.
- Be Wary of Online “Hacks” and Shortcuts: Be careful with shortcuts or “hacks” you see online. If something sounds way too easy or just a little off, it’s probably not worth the risk.
- Keep Your Records Organized: Hold on to your tax records and any supporting paperwork. Keeping things organized now can save a headache later and confusion if questions arise later.
- Consult a Tax Professional When in Doubt: If anything feels confusing or you’re not sure what to do, it’s always wise to talk to a real tax professional.
- Remember the IRS is Getting Smarter: The IRS continues to improve its ability to detect errors and fraud, so what might have slipped by before could cause real problems now.
- Protect Your Personal Information: Watch out for weird emails or calls asking for your personal information. Keeping your details private is a big deal.
- Protect Your Personal Information: If things start to feel serious or you’re worried about criminal tax trouble, reaching out to a criminal tax attorney in Washington, DC can really help you figure out what to do next, no matter if you are in the USA or abroad.
Spending a little extra time to do things the right way can really save you a lot of trouble, money, and stress down the road. Sometimes, it’s just not worth taking chances.
Honest Mistakes Deserve Honest Support
Get the best with Pelham PLLC!
Tax fraud schemes can turn a small mistake into something much bigger. The IRS takes these matters seriously, and the risks of fines, audits, and even jail are real. Sometimes, even honest people find themselves caught up in tax trouble or facing questions they didn’t expect.
If you’re in that spot, Pelham PLLC is here to help. We have a skilled criminal tax attorney in Washington, DC, who stands up for people and businesses dealing with tax disputes, audits, or investigations. Pelham PLLC doesn’t help anyone cheat the system. Instead, we work hard to protect your rights and guide you through every step if you are not at fault, no matter how complicated things seem.
If you need honest advice or strong support, reaching out early can make all the difference.
FAQs
What should I do if I get an IRS notice about tax fraud, but I know I didn’t do anything wrong?
If you get a letter from the IRS accusing you of tax fraud or asking questions about your return, don’t panic and don’t try to handle it by yourself. Sometimes, honest mistakes or even someone else’s actions can put you in a tough spot.
Diana Pelham is a criminal tax attorney in Washington, DC and she can look at your situation, talk to the IRS for you, and make sure your side of the story is heard no matter where you are in the USA or out of the country for work, study or anything else.
How does Pelham PLLC help with international tax issues if fraud or tax evasion is suspected?
If the IRS raises questions about fraud, offshore accounts, or tax evasion, Diana Pelham is ready to help. As a criminal tax attorney in Washington, DC, she guides clients outside the country. She guides clients through tough international tax matters, making sure your side is heard, protecting your rights, and handling all the back-and-forth with the tax authority, no matter where you are in the world.
How do I know if my business could get caught up in an abusive tax scheme?
If you’re running a business in the U.S. or you’re a U.S. resident with a business abroad, it’s smart to be cautious about any tax deal that sounds too good to be true.
Diana Pelham, a criminal tax lawyer, can review your situation, spot risky strategies, and help you steer clear of trouble so you don’t get pulled into something that could cost you big with the IRS.
What can Pelham PLLC do if I’m facing a tax fraud lawsuit from the IRS?
If the IRS is coming after you for tax fraud, even if you’re living or working outside the country, Diana Pelham can step in as your criminal tax attorney. She’ll stand up for you, handle the legal fight, and work to protect your finances and your future every step of the way.
What if my tax issue is small, like a missed deduction or a simple error? Can Diana Pelham help with that?
Even a small mistake can turn into a bigger problem if the IRS gets involved. Diana Pelham can help you clear things up before they grow. She’ll look over your case, help you fix errors, and make sure you’re not left dealing with bigger headaches down the road.
