Understanding the IRS “Overstated Withholding” Scam and How It Can Affect Your Business
- Jon
- 6 hours ago
- 2 min read
Tax scams are constantly evolving, and the IRS regularly warns taxpayers about emerging schemes through its annual “Dirty Dozen” list. One scam that has recently circulated on social media is the overstated withholding scheme, where individuals falsify wage and withholding information to claim larger tax refunds. In this post, Jon Markee, your Builder CPA, explains how this scam works and why home builders and business owners should be aware of it.
What Is the Overstated Withholding Scam?
The overstated withholding scam encourages individuals to falsify information on forms such as the W-2 (Wage and Tax Statement) or other forms like the 1099-NEC for non-employee compensation. In this scheme, scammers instruct people to report exaggerated income and withholding amounts and even invent a fictional employer.
The goal is to file a fraudulent tax return electronically and request a large refund based on withholding that was never actually paid to the IRS. However, when the IRS cannot verify the wages or withholding amounts reported, the refund is usually held for further review, and the taxpayer may face penalties or additional scrutiny.
How Employees Might Misuse Withholding Information
In some cases, this scheme can involve legitimate W-2 forms issued by employers. An employee may alter the withholding amounts when filing their personal tax return, increasing the numbers to claim a larger refund.
While the employer may not be directly responsible for the employee’s actions, discrepancies between the W-2 information and payroll filings submitted to the IRS can trigger questions from the agency. Even if the issue is caused by an employee’s mistake or misconduct, the IRS may still contact the employer to verify the records.
Fraudulent Filings Using Your Business Information
Another risk involves bad actors obtaining a company’s Employer Identification Number (EIN). Once scammers have access to a business name and EIN, they may attempt to file fraudulent payroll returns, such as Form 941, or create fake W-2s to support false refund claims.
This type of fraud may occur without the business owner’s knowledge. Unfortunately, when the IRS detects inconsistencies, the legitimate business may still need to respond to inquiries or provide documentation to resolve the issue.
Protecting Your Business and EIN
Many business owners underestimate the importance of protecting their EIN. While it may not feel as sensitive as a Social Security number, it can still be used to commit fraud if it falls into the wrong hands.
Consider taking these precautions:
Limit access to your EIN: Only share it with trusted parties who truly need it.
Use secure communication: Avoid sending sensitive information through unencrypted emails or unsecured platforms.
Verify requests for information: Always ask why someone needs your business details before providing them.
Maintain strong internal recordkeeping: Accurate payroll records help quickly resolve IRS inquiries if discrepancies arise.
Conclusion
The overstated withholding scam highlights how tax fraud schemes can impact not only individuals but also legitimate businesses. Even if you’ve done nothing wrong, fraudulent activity involving your company’s information can lead to time-consuming IRS inquiries.
By protecting your EIN, verifying requests for business information, and maintaining accurate payroll filings, you can reduce the risk of unnecessary complications. For more insights, watch Jon Markee, your Builder CPA, explain this IRS “Dirty Dozen” scam and how it may affect home builders and business owners.
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