IRS Dirty Dozen: The Household Employment Tax Scam You Need to Avoid

The IRS releases its “Dirty Dozen” list each year to highlight the most common and dangerous tax scams that taxpayers should avoid. While not every scheme directly affects home builders, some are highly relevant and can lead to serious financial and legal consequences. In this blog post, we’ll break down one of these scams, the improper household employment tax scheme, and share insights from Jon Markee, your Builder CPA, on how to protect yourself and your business.

What Is the Household Employment Tax Scam?

This scheme involves filing Schedule H with your Form 1040 using completely fabricated information. Schedule H is typically used to report wages paid to legitimate household employees such as nannies, housekeepers, or caregivers. However, in this scam, individuals are encouraged to create fake employees and report wages that were never actually paid.

How the Scam Works

Taxpayers falsely claim they paid wages to these non-existent employees and then attempt to take advantage of tax credits, such as sick leave or family medical leave credits. The ultimate goal is to generate a refund from the IRS based on fraudulent information. While it may be presented as a “loophole” or hidden opportunity, it is, in reality, tax fraud.

IRS Enforcement and Consequences

The IRS is actively monitoring returns that include suspicious Schedule H filings. If the IRS cannot verify the employees or wages reported, refunds may be delayed or denied. More importantly, taxpayers who participate in this scheme could face penalties, interest, and even criminal charges depending on the severity of the case.

How This Impacts Business Owners

Even if you’re not directly involved in this type of fraud, it’s important to stay informed. Misinformation spreads quickly, especially on social media, and you may encounter employees, subcontractors, or peers who believe these schemes are legitimate. As a business owner, relying on incorrect advice can lead to costly mistakes and unnecessary risk.

Avoiding Tax Scams and Misinformation

Working with a qualified CPA ensures that your tax strategies are grounded in legitimate tax law. If something sounds too good to be true, such as receiving a refund for wages paid to people who don’t exist, it likely is. Always verify your sources, and be cautious of advice that promotes shortcuts or “secret” tax credits.

Conclusion

The household employment tax scam is a clear example of how misinformation can lead to serious consequences. Staying informed and working with trusted professionals is the best way to protect your business and avoid unnecessary risk. 

For more insights, watch our latest video where Jon Markee, your Builder CPA, explains how these scams work and how to avoid them.

By remaining vigilant and seeking professional guidance, you can ensure your tax filings are accurate, compliant, and free from costly mistakes.