When Too Much Withholding Becomes Too Much Trouble
Taxpayers chasing big refunds are being misled by a growing scam that’s landed on the IRS’s 2025 Dirty Dozen list.
The overstated withholding scam involves filing tax returns with false income and exaggerated withholding amounts to trigger large, bogus refunds.
It’s showing up in viral posts and shady prep advice, but what it really delivers is frozen refunds, audit letters, and steep penalties.
What’s the Withholding Scam?
Scammers suggest creating phony W-2s, 1099s, or other tax forms showing huge income and withholding, hoping the IRS will burn through the numbers, and then hand over a massive refund.
Think: $30K+, zero scrutiny. Unrealistic? Absolutely.
How It Works
- You’re told to fabricate income and withholding out of thin air.
- You file electronically, expecting a refund based on fake payroll taxes.
- IRS systems flag the mismatch since there’s no corresponding employer or withholding record.
- Your refund is frozen, and you’re hit with notices demanding proof or worse.
Why the IRS Is Clamping Down
The IRS cross-checks your return against W-2s, 1099s, and employer/employees’ payroll data.
If your claimed withholding can’t be verified, your refund gets flagged.
Once flagged, the refund is held and the IRS may send CP05A or 3176C letters requesting documentation. No documentation? No refund. Just a lot of follow-up and potential penalties.
Why This Withholding Scam Is Risky
Aside from the fact that it’s illegal, overstating your withholding can lead to some serious consequences. If you can’t prove your numbers, the IRS may assess accuracy-related penalties, trigger an audit, or even open the door to criminal charges for filing false returns.
Tax Risks You Can’t Ignore
- No refund until you prove income/withholding legitimacy.
- Accuracy-related penalties up to 20% on understated tax liability.
- Amended returns or audit triggers with possible fines, interest, or charges.
Red Flags to Watch For
- You’re using Forms W-2, 1099-NEC, 1099-DIV, 1099-OID, etc., to claim huge withholding.
- The employer or payer is fictional.
- You’re offered no documentation or proof of these payments and you, never actually received those payments.
- You’re promised high refund amounts regardless.
What You Should Do
If you’ve filed a return with overstated withholding:
- Respond quickly to any IRS notices asking for documentation.
- If you can’t back up your claim, file an amended return right away to correct it.
- Work with a qualified tax professional to avoid further penalties or long-term issues.
How Smith Patrick CPAs Can Help
Don’t let bad advice or internet hype land you in IRS trouble. At Smith Patrick CPAs, we make sure your returns are accurate, supported by real documentation, and prepared with your best long-term interests in mind. No guesswork. No gimmicks.
More Information
If you have questions, contact us to discuss your situation.
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Benjamin Schweiss
Benjamin Schweiss is a Staff Accountant at Smith Patrick CPAs. He holds a Bachelor’s degree from the University of Missouri – Columbia and is currently pursuing a master’s in accounting. Benjamin brings experience from his previous career in corporate marketing at PepsiCo North America and aims to make accounting approachable while providing exceptional service.
About Smith Patrick CPAs
Smith Patrick CPAs is a boutique, St. Louis-based, CPA firm dedicated to providing personal guidance on taxes, investment advice and financial service to forward-thinking businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to business owners and high-net worth families across the country. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.
