The Refund Looked Real
Until the IRS Came Back.
Lessons From a $25 Million Scheme.
Eight North Carolina tax preparers pleaded guilty in a pandemic-relief fraud involving nearly $25 million in false refund claims. Here is what every taxpayer needs to know before accepting a large refund and what to do if one has already been received.
Imagine receiving a tax refund much larger than expected. Your preparer says you qualify for a special pandemic credit. The money arrives. Months pass without a notice. It may feel like the IRS reviewed and approved everything. That is not necessarily what happened.
The Justice Department announced that eight North Carolina tax return preparers pleaded guilty in a pandemic-relief tax fraud scheme involving almost $25 million in fraudulent refund claims. The preparers submitted false returns claiming a COVID-era paid sick and family leave credit. The IRS issued approximately $13.89 million in fraudulent refunds before the scheme was detected.
How a "special tax credit" becomes a taxpayer's problem
Most taxpayers hire preparers because they trust those professionals to understand the law. That trust can create an opening for dishonest or careless preparers. A taxpayer might be told things that sound reassuring but do not establish legal eligibility:
"You qualify—you were self-employed."
Simply operating a business or reporting income on Schedule C did not automatically qualify someone for the paid sick and family leave credit.
"The IRS already approved it."
A refund issued through automated processing is not an approval. The IRS can disallow the credit on audit long after the money was deposited.
"You don't need much documentation."
The paid sick and family leave credit required specific qualifying leave days, circumstances and self-employment income—all verifiable by records.
"I prepared it—you have nothing to worry about."
A dishonest preparer may face criminal charges, but the tax liability can still appear under the taxpayer's Social Security number.
Why did the IRS send the money in the first place?
Many taxpayers assume the IRS manually reviews each return before issuing a refund. It does not. Millions of returns are processed through automated systems. A refund can be issued before the IRS verifies every document, detects a pattern across returns filed by the same preparer, conducts an audit, or opens a criminal investigation.
In this case, the IRS paid approximately $13.89 million in fraudulent refunds—even though the broader scheme involved nearly $25 million in claims. The government's ability to recover and prosecute the scheme years later is a reminder that money in a bank account does not make an unsupported tax position valid.
What was the credit supposed to cover?
The paid sick and family leave provisions were created to assist certain employers and self-employed individuals affected by specific COVID-related circumstances. Eligible taxpayers generally calculated their credit using Form 7202, based on qualifying leave days and self-employment income. These credits were tied to limited pandemic periods—available for qualifying 2020 and 2021 claims, not as a general credit on later returns.
Promoters frequently take a legitimate tax provision and market it far beyond its legal limits. The underlying credit may be real. The taxpayer's claim may still be false.
The difference between a tax strategy and a tax scheme
A legitimate tax strategy begins with the taxpayer's facts. The professional asks questions, reviews documentation, applies the law and explains both the benefit and the risk. A tax scheme begins with the promised result—and then attempts to manufacture numbers to produce it.
Five questions to ask before accepting a large refund
- What is the exact name of the credit? Do not accept descriptions like "business money" or "COVID money." Ask for the formal credit name and the form on which it appears.
- Why do I personally qualify? The answer should relate to your actual income, business, expenses or family circumstances—not "the software gave it to you."
- What documents support the claim? Your preparer should identify records to retain in case the IRS asks questions later.
- How was the amount calculated? Ask to see the calculation. A $20,000 refund should never appear as a surprise on the final screen before filing.
- What happens if the IRS disagrees? A competent professional will discuss risks and documentation standards—not just the benefit.
Warning signs, actions and resources
| Warning Sign | Why It Matters | What To Do |
|---|---|---|
| Preparer guarantees a refund before reviewing records | No professional can guarantee an outcome without knowing your facts. | Stop. Request a full review of your documentation first. |
| Fee is a percentage of the refund | Creates an incentive to inflate the refund, not file accurately. | Confirm the fee structure in writing before proceeding. |
| Preparer refuses to sign the return or include a PTIN | Paid preparers are required by law to sign and include their Preparer Tax Identification Number. | Do not authorize filing. Report to the IRS using Form 14157. |
| Return shows a business, dependents or withholding you don't recognize | These are common indicators of fabricated entries designed to inflate the refund. | Do not sign. Compare every line against what you provided. |
| Preparer asks you to sign a blank or incomplete return | Signing a blank return gives the preparer authority to enter any figures. | Never sign a return you have not fully reviewed. |
| Refund is directed to an unfamiliar account | Ghost preparers sometimes divert refunds to their own accounts. | Confirm direct-deposit details before filing. |
What to do if the refund has already been received
Do not assume the issue will resolve itself because the IRS has not contacted you. Begin your review with the following steps.
- Obtain the complete return. Request every page, schedule, election and attachment—not only the two-page Form 1040 summary.
- Identify unfamiliar entries. Look for credits, businesses, dependents or withholding amounts you did not provide or expect.
- Preserve all communications. Save text messages, emails, invoices, advertisements and any files exchanged with the preparer.
- Pull IRS transcripts. Account and return transcripts show what was filed, what the IRS processed and whether notices or adjustments have occurred.
- Recalculate the correct return. Determine what the tax result would have been without the questionable claim.
- Get professional advice before amending. Timing and presentation matter—particularly when the original return included fabricated documents or knowingly false information.
- Report unauthorized filing if applicable. Form 14157 covers preparer complaints. Form 14157-A applies when a preparer filed or changed a return without the taxpayer's authorization.
"My preparer did it" may not eliminate the tax bill
A dishonest preparer can face criminal charges, civil penalties, professional sanctions and imprisonment. However, that does not automatically remove the improper credit from the taxpayer's account. Taxpayers sign returns under penalties of perjury and are expected to confirm accuracy.
Even a genuine victim of preparer misconduct may still need to correct the tax account, provide evidence to the IRS, repay any refund received and request available penalty relief. A taxpayer who knowingly agreed to false information is in a very different legal position from someone whose preparer acted without consent—but both may still owe the money.
This is not only a pandemic-credit problem
The same pattern can appear whenever a tax provision becomes popular—the employee retention credit, fuel tax credits, research credits, clean-energy incentives, invented withholding or abusive trust arrangements. The marketing language changes; the warning signs do not:
Frequently Asked Questions About Tax Preparer Fraud, False Refunds and Pandemic Tax Credits
1. What happened in the North Carolina tax preparer fraud case?
Eight North Carolina tax return preparers pleaded guilty for their roles in a pandemic-relief fraud scheme involving false federal income tax returns. Prosecutors said the returns improperly claimed COVID-related paid sick and family leave credits and generated millions of dollars in fraudulent refund payments.
2. How much money was involved in the tax fraud scheme?
The Justice Department described the overall scheme as involving almost $25 million in fraudulent claims. According to the government, the IRS paid approximately $13.89 million in refunds connected with the false returns.
3. What tax credit was used in the alleged fraud?
The returns improperly claimed the paid sick and family leave tax credit. This temporary pandemic-era credit was available only to certain qualifying employers and self-employed individuals who met specific legal requirements.
4. Was the COVID paid sick and family leave tax credit real?
Yes. The paid sick and family leave credit was a legitimate federal tax benefit. The problem arises when taxpayers claim the credit without meeting the eligibility requirements, use false information or claim the credit for an incorrect tax year.
5. Could every self-employed taxpayer claim the pandemic sick leave credit?
No. Self-employment income alone did not automatically qualify a taxpayer for the credit. The taxpayer generally needed a qualifying COVID-related reason for being unable to work and had to calculate the credit using eligible leave days and self-employment income.
6. What was Form 7202 used for?
Form 7202 was used by qualifying self-employed individuals to calculate credits for certain sick and family leave periods. The form required information about qualifying leave days, self-employment income and any related benefits received from an employer.
7. Does receiving a refund mean the IRS approved the return?
No. The IRS may process a return and issue a refund before verifying every credit, deduction or supporting document. The agency can later audit the return, disallow the claim and require the taxpayer to repay the refund.
8. Can the IRS take back a refund after it has been deposited?
Yes. If the IRS later determines that a refund was improper, it may assess additional tax and demand repayment. The taxpayer may also owe interest and penalties depending on the circumstances.
9. Can a taxpayer be responsible for fraud committed by a tax preparer?
A taxpayer may still be responsible for correcting the return and repaying an improper refund, even when the preparer created the false claim. Whether penalties apply may depend on what the taxpayer knew, what information was provided and whether the preparer acted without authorization.
10. What happens if my tax preparer put false information on my return?
You should obtain a complete copy of the filed return, preserve all communications and have the return independently reviewed. Depending on the facts, you may need to file an amended return, respond to the IRS or report the preparer.
11. What if my tax preparer filed a return without my permission?
A taxpayer whose return was filed or altered without permission should document what happened and contact a qualified tax professional. The taxpayer may also report the conduct to the IRS using the appropriate preparer complaint and misconduct forms.
12. How can I tell whether a tax credit on my return is legitimate?
Ask the preparer for the exact name of the credit, the legal reason you qualify, the form used to calculate it and the records supporting the claim. A legitimate preparer should be able to explain the credit in clear language.
13. What are common warning signs of tax preparer fraud?
Warning signs include guaranteed refunds, percentage-based fees, unsigned returns, invented businesses, false expenses, unfamiliar bank accounts, missing preparer identification numbers and refusals to provide a complete copy of the return.
14. What is a ghost tax preparer?
A ghost preparer is a paid tax return preparer who does not sign the return or include a valid Preparer Tax Identification Number. Ghost preparers may attempt to avoid responsibility for false or inflated tax returns.
15. Should a tax preparer charge a percentage of my refund?
Taxpayers should be cautious when a preparer bases the fee on the size of the refund. That arrangement may encourage the preparer to inflate deductions, credits or withholding to increase the refund amount.
16. What should I review before signing my tax return?
Review your filing status, dependents, wages, withholding, business income, deductions, refundable credits, bank information and preparer details. Make sure the return accurately reflects your actual income, expenses and personal circumstances.
17. Why is my refund much larger than expected?
A larger refund may result from legitimate credits, additional withholding or tax law changes. However, an unexpectedly large refund should be carefully reviewed to confirm that no false income, unsupported credit or fabricated deduction was added.
18. What should I do if I do not recognize a form on my tax return?
Ask the preparer to identify the form and explain why it applies to you. Do not authorize filing until you understand the form's purpose, the information reported and how it affects your tax liability or refund.
19. Can the IRS charge penalties for an improper tax credit?
Yes. The IRS may assess penalties when a return understates tax or claims an improper refund. Penalties may depend on whether the error resulted from negligence, substantial understatement, fraud or another violation.
20. Can I request penalty relief if my preparer made the mistake?
Possibly. Penalty relief may be available when the taxpayer acted reasonably and relied on a qualified professional in good faith. Relief is not automatic and depends on the facts, documentation and level of taxpayer involvement.
21. Should I amend a return that contains a false credit?
An amended return may be appropriate, but taxpayers should obtain professional advice before filing. The timing, explanation, supporting documents and potential consequences should be evaluated carefully.
22. Can amending a return prevent an IRS audit?
No. Filing an amended return does not guarantee that the IRS will avoid an examination. However, voluntarily correcting an error may help demonstrate good-faith compliance and may reduce future complications.
23. How far back can the IRS audit a fraudulent tax return?
The normal IRS examination period is often three years, but longer periods may apply in certain cases. When a fraudulent return is filed with the intent to evade tax, the IRS may have an unlimited period to assess tax.
24. What records should support a large refundable tax credit?
Taxpayers should retain records showing the legal eligibility requirements, dates, income, expenses, qualifying events and calculations used for the credit. The necessary documents depend on the specific tax provision.
25. How can I report a dishonest tax preparer to the IRS?
Taxpayers can report suspected preparer misconduct using IRS Form 14157. Form 14157-A may also apply when a preparer filed or altered an individual tax return without the taxpayer's consent.
26. What documents should I save after discovering preparer misconduct?
Save the filed return, draft returns, invoices, engagement letters, text messages, emails, advertisements, bank records, uploaded documents and any written statements about the promised refund.
27. Can a false tax return affect my ability to obtain a mortgage?
Yes. Incorrect tax returns can affect income verification, tax transcripts and lender underwriting. An unresolved IRS balance, amended return or inconsistent business income may delay or complicate a mortgage application.
28. Are pandemic-related tax credit claims still being investigated?
Yes. Federal investigators can continue examining pandemic-era claims after the underlying programs have ended. Tax return data, refund records and preparer filing patterns may support audits or criminal investigations years later.
29. What other tax credits are commonly targeted by fraud promoters?
Fraud promoters may misuse the employee retention credit, fuel tax credit, research credit, clean-energy credits, household employment taxes and other refundable or business-related tax provisions.
30. How can taxpayers protect themselves from tax preparer fraud?
Choose a qualified preparer, confirm that the preparer signs the return, review every page before filing, ask questions about unfamiliar credits and retain copies of all supporting documents. Taxpayers should never approve a return they do not understand.
Concerned about a prior refund or credit claim?
McGregor Financial Services assists taxpayers with return reviews, amended-return evaluations, accounting reconstruction, tax compliance and IRS representation. Have the return independently reviewed before the issue becomes an examination or collection matter.
Speak with an AdvisorSources: U.S. Department of Justice, "Eight North Carolina Return Preparers Plead Guilty in Almost $25M Pandemic-Relief Fraud Scheme," June 24, 2026. Internal Revenue Service, paid sick and family leave credit guidance for self-employed individuals; guidance on misleading sick and family leave credit claims; guidance on choosing and reporting tax return preparers; Forms 14157 and 14157-A.
Disclaimer: This article is for general informational purposes only and is not legal or tax advice. Tax results depend on individual facts, income, filing status, documentation and filing history. Obtain professional advice before amending a return or responding to an IRS inquiry.