Tax Credit and Refund Fraud: Proving the Activity Behind the Claim

Invented wages, fuel production or expenses can give a tax credit fraud whistleblower evidence of a false refund claim. The claim says something happened inside a business. You may know that the employees never worked there, that the fuel had already been produced, or that the client told the preparer something entirely different. A refund check shows that Treasury paid. The business records show what the claim was built on.

This page follows the activity behind tax refund and credit claims, from payroll to production to the preparer’s worksheets. Our broader treatment of tax fraud evidence connects the books and returns across other schemes, while the IRS whistleblower program page explains the federal award framework.

What Evidence Shows Tax Credit Fraud?

The useful evidence connects the taxpayer, the tax period, the claimed activity and the records showing what actually happened. For a refund or tax credit claim, we examine the return alongside the wages, purchases, expenses or transactions it represents. Your knowledge of who prepared those entries and what they were told can explain how the false number reached the IRS.

Different records answer different parts of that inquiry:

• The activity: payroll registers and wage payments, fuel production and shipment records, or the client’s actual expenses.
• The claim: the return, amended return, credit calculation and supporting worksheets.
• The decision: client instructions, internal communications, earlier warnings and the people who controlled the entries.
• The money: the refund issued, the account or payee receiving it, and fees retained by the preparer or promoter.

An employer, a payroll agent, a bank and a return preparer can each hold a different part of the transaction. We connect those records with your account of how the business operated, including where relevant records are held when they are outside your possession.

A 2014 Villanova Law Review article describes tax shelters whose returns concealed what the transactions really did. The paper connects circular cash flows and efforts to hide the schemes on clients’ returns to the need for inside knowledge:

Employee Retention Credit Fraud Starts With the Payroll

Employee Retention Credit fraud can rest on an employer or workforce that existed only in the claim. Payroll history, wage payments, incorporation records, Forms W-2 and preparation worksheets let us compare the claimed employees with the business that supposedly paid them. The relevant period is the wage quarter, even when someone submits the refund claim much later.

The IRS’s guidance for the 2020 Employee Retention Credit ties eligibility to qualifying government restrictions or a decline in receipts. Payroll and receipts from the relevant period therefore matter alongside whatever explanation the promoter used to sell the claim.

Credit Reset Allegedly Supplied the Business Along With the Claim

The criminal indictment concerning Credit Reset alleges more than 8,000 false quarterly employment-tax returns seeking more than $600 million in Employee Retention Credits and sick- and family-leave credits. It says Treasury disbursed approximately $45 million.

The indictment alleges that many entities were inactive, had no employees, lacked a physical business location or had no timely wage filings. When a prospective client lacked a business with an employer identification number, participants allegedly supplied one or helped the client buy one. The entities supplied were often shell companies or businesses that had stopped operating. We see a ready-made employer sold with an employee-retention claim.

The indictment also alleges overlapping use of the same wages. Some returns sought leave credits larger than the wages reported, counted wages as both sick leave and family leave, or claimed leave credits and Employee Retention Credits for the same wages. For a payroll insider, the comparison reaches how wages were assigned across claims as well as whether anyone was paid.

The alleged paperwork followed the refund claim backward. When the IRS and Social Security Administration asked for more information, participants allegedly prepared false wage statements corresponding to the earlier returns. The indictment also describes instructions about false answers clients should give the IRS and fees based on refunds. For someone inside a preparation business, the original payroll records and the later instructions tell very different stories.

Fuel Tax Credit Fraud Follows the Fuel and the Payee

Fuel tax credit fraud can turn on whether the claimed production or sale happened at all. A production ledger, shipment record and invoice can describe the same fuel at different stages. Comparing them can show whether a claimed new batch was fuel that had already been produced.

In the criminal case involving Washakie Renewable Energy’s owners and a business associate, the Justice Department’s account describes previously produced biodiesel labeled as feedstock and fuel moved around to simulate new production and sale. The owners pleaded guilty, and a jury convicted the business associate. The scheme generated more than $1 billion in refundable-credit claims, with more than $511 million paid. The fuel kept moving. The new production was on paper.

For an employee in plant operations, transport or accounting, the useful connection is between what moved and what the tax paperwork called it. Invoices and shipment records can explain whether a transaction represented new production or another movement of existing fuel.

Identity and payment records can expose a different fuel tax credit scheme. In its account of a Northern District of Georgia guilty plea, the Justice Department described corporations created using stolen identities, false fuel-credit returns and altered check payees. More than 100 Treasury checks totaling over $3.5 million were issued. The entity named on the return, the person whose identity was used and the eventual payee each answer a different question about who controlled the refund.

Tax Preparers Can Replace the Client’s Facts

Tax preparer fraud becomes visible when the return contradicts what the client actually supplied. The source expenses and client instructions show the starting facts. The filed return and preparation records show what the preparer did with them.

In the Justice Department’s account of a guilty plea involving Advanced Accounting Concepts, the preparer treated clients’ homes as entirely business use despite being told they were principally residences. The resulting deductions exaggerated the clients’ expenses. The clients said residence. The returns said office.

A different case involved tax credits supposedly awarded for scientific breakthroughs. The Justice Department’s civil complaint alleged that a promoter sold nonexistent research and other credits through gift certificates, assignments, purported IRS stamps and an invented IRS certificate. The Energetic Psychoanalytic Institute and Training School purported to hold the credit instrument behind the arrangement. The Justice Department later announced that the court permanently barred promotion of the bogus federal research credits.

For research tax credits, we follow the claimed expenditure, its owner and the calculation behind the amount on the return. In a purported credit transfer, the assignment belongs beside the activity said to have generated the credit and any earlier disallowance notices. The alleged certificate scheme shows why an official-looking document needs to be connected to actual expenditures.

The Refund Can Pay the Preparer Before the Customer

The Justice Department’s complaint against Liberty Tax describes a preparation business that also controlled the movement of refund money. It alleged that store software sent returns to Liberty Tax for electronic filing and that customers could defer preparation fees. The complaint explains where those fees came from:

That description puts the refund distribution records alongside the return-preparation records. The client could supply the original facts, the store prepare the return, and the parent company transmit it and receive the refund before distributing the balance. For someone who knows where those functions sit, the fee and payment records help explain who handled the claim and who received the money.

Foreign Tax Credits Follow Who Bore the Tax

Foreign tax credit arrangements require a different comparison: the claimed foreign tax against the agreements and cash flows behind it. In the American International Group matter, the Justice Department alleged that shell entities and offsetting flows supported credits even though AIG did not bear the foreign tax in full. The agency described arrangements that manufactured tax benefits through differences between tax systems.

Under the AIG settlement approved in October 2020, more than $400 million in foreign tax credits were disallowed. For an insider familiar with the transaction, the agreements and offsetting payments explain the economic burden behind the credit. Here, the activity comparison follows money across entities rather than employees through payroll or fuel through a plant.

How Does a Tax Credit Fraud Whistleblower Get Paid?

For federal tax refund and credit fraud, the IRS whistleblower program connects qualifying information to an award based on collected proceeds. Federal tax claims are excluded from the federal False Claims Act. We assess the claim with you through the IRS whistleblower award process, connecting it to the transactions and records you know.

Qualifying state tax cases have separate False Claims Act routes, including in New York and D.C. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. A qualifying IRS whistleblower award uses the same range, applied to collected proceeds.

Your information’s contribution to the recovery matters as much as the claim’s size. We work with you to connect the particular taxpayer, period and false claim to the evidence that can help the IRS recover money. That is where knowledge of the missing workers, recycled fuel or invented expenses becomes useful to a whistleblower case.

When the Claim Describes a Business You Do Not Recognize

If you know the payroll, production or client records behind a false tax credit claim, speak with our whistleblower experts about what the return says happened. We work beside you to build your strongest tax credit fraud whistleblower case around that discrepancy and bring in tax fraud whistleblower lawyers who understand the credit and the business behind it. Your knowledge deserves a team that can follow it from the original records to the recovery.