Background Historically, research investigating neural correlates of mentalizing deficits in schizophrenia has focused on patients who have been ill for several years with lengthy exposure to medication. Little is known about the neural and behavioral presentations of theory-of-mind deficits in schizophrenia, shortly after the first episode of psychosis. Methods We investigated social cognition in 17 recently diagnosed first-episode schizophrenia (FES) patients with little or no exposure to antipsychotic medication and 1:1 matched healthy controls. We recorded behavioral and neural responses to the Animated Triangles Task (ATT), which is a nonverbal validated mentalizing task that measures the ascription of intentionality to the movements of objects. Results FES patients under-interpreted social cues and over-interpreted nonsocial cues. These effects were influenced by current intelligence (IQ). Control group and FES neural responses replicated earlier findings in healthy adults. However, a region of anterior medial prefrontal cortex (amPFC) of FES patients showed a different response pattern to that of controls. Unlike healthy controls, patients increased activity in this social cognition region while studying "random" movements of shapes, as compared to the study of movements normally interpreted as "intentional". Conclusions Mentalizing deficits in FES consists of hypo- and hypermentalizing. The neural pattern of FES patients is consistent with deficits in the ability to switch off mentalizing processes in potentially social contexts, instead increasing them when intentionality is not forthcoming. Overall, results demonstrate complexities of theory of mind deficits in schizophrenia that should be considered when offering social cognitive training programs.