Imagine a scenario that reflects the pattern the IRS describes: a restaurant server walks into a tax office and is told she qualifies for thousands of dollars in new deductions on her tips. The preparer asks for a cut of the refund. No pay stubs are reviewed, no paperwork is checked, and the preparer never signs the return. Weeks later, the server discovers the deductions were fabricated and she owes the IRS money she never actually received.
That composite illustration mirrors the exact tactics the IRS is flagging this filing season. In a formal alert issued in spring 2026, the agency said dishonest tax preparers are targeting service workers by fabricating eligibility for the new tip and overtime deductions created under the One, Big, Beautiful Bill. These preparers charge excessive fees, often pegged to a percentage of the refund, and in some cases demand that filers split the refund or route it to a third-party account.
How the scams work
The IRS says some preparers are telling restaurant servers, hotel housekeepers, rideshare drivers, and other hourly workers that “everybody qualifies” for large new write-offs on tips and overtime. In reality, the deductions carry specific caps and income phaseouts spelled out in IRS guidance under IR-2025-114. Not every tipped or hourly worker is eligible, and the amounts depend on actual documented earnings.
Because 2025 is a transition year for the OBBB tax changes, employer reporting has not fully caught up. The IRS has said filers can use pay statements and personal logs to compute deductions when updated forms are not yet available. That flexibility was designed to keep eligible workers from losing out while payroll systems adapt, but it has also opened a window for bad actors to manipulate the numbers.
The overtime deduction is particularly ripe for abuse. As described in the OBBB’s overtime tax provisions and reflected in IRS guidance under IR-2025-114, only the premium portion of overtime pay above the worker’s regular rate is deductible, not the full overtime wage. Here is what that means in practice: a worker earning $20 an hour gets paid $30 for each overtime hour ($20 base plus $10 premium). Only that $10 premium qualifies for the deduction, not the full $30. For tax year 2025, the premium often does not appear as a separate line on employer statements. Dishonest preparers exploit the gap by treating all overtime pay as deductible or by guessing at the premium without doing the math, creating inflated deductions that will not survive an audit.
The fee structure is one of the clearest red flags. Legitimate preparers typically charge a flat fee or bill by the hour. When a preparer ties compensation to the size of the refund, the incentive shifts toward inflating the numbers. The IRS has long flagged percentage-of-refund and refund-splitting arrangements as hallmarks of fraud, and the agency’s spring 2026 alert reiterates that these practices are especially dangerous in the context of the new OBBB provisions.
Ghost preparers and who bears the risk
The IRS calls preparers who refuse to sign returns and omit their Preparer Tax Identification Number (PTIN) “ghost preparers.” In separate guidance on ghost preparers, the agency notes these operators are frequently linked to inflated refunds built on improper credits and deductions. By law, any paid preparer must sign the return and include a valid PTIN.
When that signature is missing, the taxpayer becomes the only identifiable party on the filing, even though a third party created the numbers. That is not just a technicality. Filers who unknowingly submit a fraudulent return still bear legal responsibility for every line. The consequences can include the IRS accuracy-related penalty of 20% of the underpayment, and if the agency determines fraud, that penalty can climb to 75%. On top of that, the filer owes interest on the full amount from the original due date, plus repayment of any inflated refund.
What the IRS has not yet revealed
As of May 2026, the IRS has not released data on how many complaints or audits this filing season are specifically tied to bogus OBBB tip and overtime claims. The agency’s published warnings are preventive, not enforcement reports, and no named actions against preparers exploiting these particular deductions have been made public. The IRS has also not announced whether it has dedicated additional enforcement staffing or audit capacity specifically to these claims.
The Department of Labor, whose FLSA rules define which workers earn overtime and how the premium is calculated, has not issued guidance on how its overtime definitions interact with the new IRS deductions in fraud scenarios. The two agencies have not publicly outlined coordinated audit strategies, leaving open questions about how disputes will be resolved when an employer’s classification of hours conflicts with a deduction claim built on a preparer’s advice.
It is also unclear how effectively IRS automated filters can catch improper claims at the processing stage versus flagging them in audits months or years after refunds have been paid. Tax professionals widely expect transition-year filings to generate higher error rates, and without published statistics, the scope of the problem remains unknown.
What workers should do right now
Service workers who received tips or overtime in 2025 should start with their own records, not a preparer’s promises. That means gathering pay stubs, tip logs, and any employer statements that break out overtime hours. Before signing or authorizing an e-file, workers should ask the preparer to walk through exactly how the tip or overtime deduction was calculated and compare that explanation against the numbers on their own documents.
Workers should also verify three things about any paid preparer:
- The preparer signs the return.
- The preparer includes a valid PTIN.
- The preparer’s fee is not tied to the refund amount.
The IRS maintains a searchable directory of credentialed preparers that can help filers confirm qualifications before handing over personal information.
Workers who believe a preparer has already filed a fraudulent return on their behalf can report the preparer using IRS Form 14157 and should consider filing an amended return to correct the record before the IRS initiates its own review. Free alternatives to paid preparers exist as well: the IRS Free File program and Volunteer Income Tax Assistance (VITA) sites offer no-cost preparation for qualifying taxpayers, removing the financial pressure that dishonest preparers use as leverage.
Why your own pay records matter more than ever
New tax provisions always attract opportunists, but the combination of brand-new deductions, a transition year with incomplete employer reporting, and millions of potentially eligible workers makes this filing season unusually fertile ground for fraud. The IRS has put preparers on notice. Workers who take 10 minutes to pull their own pay stubs and run the numbers will be far harder to deceive than those who walk into a tax office hoping for a windfall.
