Refund Fraud

Refund fraud is the government's term for obtaining, or trying to obtain, money from the Treasury with a return that misstates the facts: withholding that was never paid in, credits the filer did not qualify for, dependents who do not exist, or a refund claimed in someone else's name. It is investigated by IRS Criminal Investigation and prosecuted as a federal felony.

How the cases are charged

• Filing a false return under section 7206(1), which requires a willfully false statement on a return signed under penalties of perjury
• Making a false claim against the United States under 18 U.S.C. section 287, the statute most often used for fabricated refunds
• Conspiracy, wire fraud, and aggravated identity theft where the scheme involved others or used another person's identity

A single fraudulent refund can support all of these. Each carries its own sentence, and the loss figure the government attributes to the scheme drives the sentencing range more than anything else.

The schemes the IRS is pursuing now

Since 2023 the largest category has been the Employee Retention Credit. Promoters marketed the credit to businesses that did not qualify, and the IRS has paired criminal referrals with a withdrawal process and a voluntary disclosure program for employers who want to unwind a claim before it is examined. Fuel tax credits, sick and family leave credits, and fabricated withholding on Forms W-2 and 1099 are the other recurring patterns, alongside preparer-driven schemes where one preparer inflates hundreds of returns. See tax fraud for how false-return cases are built generally.

What separates a defendant from a victim

Many refund fraud cases begin with a preparer or promoter, and the taxpayer's exposure turns on what they knew. Signing a return you did not read is not a crime; signing a return you knew contained a credit you never earned is. The records that decide the question are the engagement with the preparer, what was represented, what the taxpayer was told the refund was for, and where the money went.

For businesses that claimed the Employee Retention Credit on a promoter's assurance, withdrawing an unpaid claim or repaying a paid one through the IRS program can end the matter on the civil side. That window closes once an examination or investigation begins, so timing is the first question.

Civil penalties run alongside

Even where no charge is brought, an erroneous refund claim carries a 20 percent penalty under section 6676, a frivolous return can draw a $5,000 penalty, and the refund itself is recovered with interest. The criminal tax defense overview explains how a civil matter becomes a criminal one, and when the voluntary disclosure route is available.