If you shy away from doing your own taxes, you’re not alone. According to IRS statistics for the 2017 filing season (2016 returns), 58.5% of Americans who e-filed hired tax professionals to prepare their returns. Doing your own return can be time-consuming, frustrating, and not a little intimidating.
Having someone else prepare your taxes can take a load off your shoulders. However, if you don’t choose the right person, you could face even bigger problems. There are dishonest tax preparers out there looking to make a quick buck, just as there are unscrupulous practitioners in any business. We have all heard of tax scams perpetrated on unsuspecting clients, so be circumspect about whom you hire to do your taxes.
Familiarize yourself with the most popular tax scams committed by tax preparers, noted below, and pay attention to the tips on what to look for when choosing someone to help you prepare your taxes.
Top Tax Scams to Watch Out For
The IRS has for years published an annual list of tax scams called the “Dirty Dozen.” As you can see, the scams are wide-ranging and do not simply involve preparer fraud. Here’s the list for the 2017 filing season:
- Phone Scams
- Identity Theft
- Return Preparer Fraud
- Fake Charities
- Inflated Refund Claims
- Excessive Claims for Business Credits
- Falsely Padding Deductions on Returns
- Falsifying Income to Claim Credits
- Abusive Tax Shelters
- Frivolous Tax Arguments
- Offshore Tax Avoidance
Of these, numbers 4-9 may well involve preparers serving the public.
Return Preparer Fraud (#4)
Return preparer fraud may take many forms, possibly involving any of the above listed scams. People who prepare taxes for remuneration are supposed to register with the IRS each year to obtain or renew a Preparer Tax Identification Number (PTIN). Being paid to prepare taxes without obtaining a PTIN is fraud. Of course, a fraudulent preparer might also be selling identities, since they would have access to names, addresses, birth dates, Social Security Numbers, and, perhaps driver’s license numbers – all information that could be used to steal someone’s identity or file a false tax return.
Fake Charities (#5)
From the tax-preparation angle, gifts to fake charities could result in an increased number of itemized deductions, and therefore lower taxable income, less tax, and a fatter refund. The IRS maintains a list of valid charitable organizations, which you can check to make certain supposed charities are, in fact, tax-exempt organizations able to receive charitable donations.
Inflated Refund Claims (#6)
Anything that reduces taxable income or “qualifies” one for exemptions or credits could result in an inflated refund claim. We already mentioned fraudulent charitable donations. One could also claim the Child and Dependent Care credit, even though no such child care was paid. One could falsely claim a child as a dependent in order to get the child’s exemption, the child tax credit, and possibly an increased Earned Income Tax Credit.
One could also inflate income, especially income from a side business, in order to increase one’s Earned Income Tax Credit. These inflated refund claims could originate with the preparer or with the taxpayer and go through because the preparer did not do their due diligence.
Numbers 7-9 have already been illustrated in the previous three paragraphs. We might mention here that fraudulent claims of educational expenses can also find their way onto a tax return and result in an increased refund. Legitimate preparers do sufficient due diligence to verify that taxpayers are entitled to the exemptions they claim, as well as the credits for which they qualify, in particular the child tax credit, the additional child tax credit, the American Opportunity Credit, and the Earned Income Tax Credit.
In fact, preparers are required to perform due diligence related to those credits, and are fined if they fail to do so. It is one way the IRS is trying to reduce the $12-$14 billion in erroneous EITC claims each year. You may recall that for the 2017 filing season, 2016 returns that had these three refundable credits were delayed until mid-February to allow the IRS to screen out fraudulent or erroneous claims for these credits.
How to Protect Yourself Against Common Tax Scams
How do you protect yourself from these tax-related scams? Let’s look at three scams to learn how to avoid being taken in.
1. Depositing Your Refund in Their Bank Account
Issues with refund-skimming and excessive fees often start with a simple request. If tax preparers offer you an advance on your refund, with the requirement that you allow your refund to be deposited directly into their bank account, beware! Alternatively, they may tell you that they can take their fee out of your refund – but when it comes time to pay up, suddenly their fees have increased, maybe dramatically. Even worse, they’re in possession of the refund and you’re not.
How to Protect Yourself
Never allow a private tax preparer to deposit your refund into their own bank account. Circular 230, which governs tax preparer practice, specifically prohibits this. Some larger companies issue you a debit card with your refund (although the IRS now does this for you as well, with fewer fees), and some still offer tax refund anticipation loans (RALs).
Whatever method you use to get your refund, make sure you get a copy of your tax return where your exact refund is clearly stated. You should also get an invoice or other statement from a tax preparer that clearly states their fees – including a range for “difficult” returns, so they can’t claim later on that the increased fee is due to your return being more challenging than originally thought.
2. Identity Theft
The IRS is aware of several identity theft scams where individuals pose as tax preparers in order to obtain people’s financial information. Some even pose as the IRS itself in order to demand information – or, simply, cash. With the rise of e-filing, more and more people are falling prey to phishing scams, in which someone contacts you claiming to be from the IRS and requesting personal information or money.
The IRS never, ever contacts anyone initially by email. Representatives always send a letter first. If you are concerned about whether a contact from the IRS is genuine, you can call 800-829-1040 to ask whether you were sent any communications.
How to Protect Yourself
Always use a trusted, recommended tax preparer to do your taxes. If someone wants a lot of money up front, claims to need more information than what’s on your forms, or doesn’t seem to be a competent professional, it should raise suspicions.
3. Fraudulently Manipulating Returns for Larger Refunds
One method that questionable tax preparers sometimes use to reel in new clients is to claim that they can get a much larger refund for you than anyone else can. Sometimes, they even offer to work for a percentage of the refund, instead of a flat fee. This, again, is prohibited by Circular 230.
Unfortunately, the way most of these preparers get you a bigger refund is by adding in charitable deductions you never made, claiming people as dependents who really aren’t, or making other fraudulent changes to your tax return. And, in many cases, people who get these enormous refunds are so pleased with their “super accountant” that they refer friends and family members, who then could be liable for tax fraud.
How to Protect Yourself
Always double-check the tax forms your accountant prepares before signing them and mailing or e-filing them. You’re the one who has to answer if you get audited by the IRS, and you could get in serious trouble for fraudulent information. Remember that you sign your return (whether in hard copy or electronically) under penalty of perjury. Since you are responsible for what is in your return, it behooves you to review it carefully before signing and filing it.
Tips for Choosing a Tax Preparer
In 2015, the IRS began a voluntary program called the Annual Filing Season Program (AFSP) to encourage paid preparers to participate in relevant continuing education courses in the areas of yearly tax updates, federal tax law, and ethics. When preparers meet the education requirements, they are recognized with a Certificate of Completion.
In addition, they are entitled to have their name listed in a database maintained by the IRS of persons who have received their certificate, as well as other credentialed practitioners (CPAs, and Enrolled Agents, among others). That database is available to the public and is searchable by zip code, so that taxpayers can verify the credentials of their preparers.
Beginning in 2016, only credentialed practitioners and AFSP participants can represent clients before the IRS. AFSP participants’ representation rights are limited, but nonparticipants have no representation rights.
Besides checking the IRS database of preparers, keep the following tips in mind as well:
- Investigate Marketing. Be very wary if tax preparers claim they can get a larger refund than their competitors.
- Examine Fees. You should avoid preparers whose fee is a percentage of the refund.
- Review the Return Before It’s Filed. If they refuse to give you a copy of your tax return or allow you to see it before it is filed, that’s a big red flag. It is also a violation of Circular 230 and carries a $50 penalty for the preparer.
- Review Experience. If something does go wrong, you may need your preparer to help you answer questions or clarify issues months or even years after the return was filed. If they are not around, they won’t be much help.
- Check Credentials. Only tax attorneys, certified public accountants (CPAs), and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collection, and appeals. AFSP participants may only represent you for a return that they personally completed and signed, which means if you have issues from prior years, they can’t legally help.
- Ask About Professional Affiliations. The best organizations are those that require their members to get continuing education, and hold them to a professional code of ethics. While this can’t screen everyone out, many fly-by-night tax preparers won’t want to pay the money to join.
- Expect Your Tax Preparer to Be Thorough. Make sure your preparer asks to see documentation, forms, receipts, and asks a lot of questions. They need to determine whether you qualify for different tax breaks, or how to classify your expenses. It also helps you to avoid penalties later. If the tax preparer has few questions, or none at all, that is a cause for concern.
In addition, don’t forget these important IRS rules:
- You Are Responsible and Liable for the Content of Your Tax Return. Even if someone else fills it out, you’re ultimately responsible for what’s on your return.
- Never Sign a Tax Return Before Checking That It Is Accurate. Once you sign your return, you’re acknowledging that you agree with the contents and you are confident they are correct. If you can’t say those things, you shouldn’t sign it. When you sign the return, you are asserting under penalty of perjury that it is complete and accurate.
This tax season, keep your eyes open and don’t let the promise of a big payoff keep you from doing a thorough check on your tax preparer. We’re all looking for a bigger refund, but we need to do so safely and legally. Be smart and circumspect, and you should have nothing to worry about.
Have you gotten any sales pitches from shady tax preparers? What did you do?