If you shy away from preparing your own taxes, you’re not alone. According to IRS statistics for the 2018 filing season (the 2017 tax year), nearly 60% of Americans who e-filed hired tax professionals to prepare their returns. Doing your own return can be time-consuming, frustrating, and more than a little intimidating.
Having someone else prepare your tax return can take a load off your shoulders. However, turning your tax return over to the wrong person can do more harm than good. There are dishonest tax preparers out there looking to make a quick buck, just as there are unscrupulous practitioners in any profession. You’ve probably heard horror stories of tax scams perpetrated on unsuspecting clients. It pays to be cautious about who you hire to do your taxes.
Below are some of the more popular tax scams committed by tax preparers. Familiarize yourself with these schemes so you’ll know what to look out for, then read on to learn how to choose someone to help you at tax time.
Top Tax Scams to Watch Out For
For the past several years, the IRS has published an annual list of tax scams called the Dirty Dozen. These scams are wide-ranging and involve more than tax preparer fraud. Here are the top scams from the 2018 filing season:
- Phishing. Fake emails or websites are designed to steal personal information.
- Phone Scams. Taxpayers receive a call from a criminal impersonating an IRS agent. The caller threatens arrest, deportation, license revocation, and more unless the taxpayer provides credit card information or another form of payment immediately.
- Identity Theft. Scammers steal a taxpayer’s personal identifying information. Often, they use it to file a false return and collect a tax refund.
- Return Preparer Fraud. Dishonest tax preparers scam clients and perpetuate refund fraud, identity theft, and other scams that hurt their clients.
- Fake Charities. Groups pose as charitable organizations to solicit donations. They may have names similar to legitimate charities.
- Inflated Refund Claims. Preparers promise a big refund before looking at taxpayer records or charge fees based on a percentage of the refund.
- Excessive Business Credit Claims. Preparers claim refunds for which the taxpayer is not eligible, such as the fuel tax credit and the research and development credit.
- Padding Deductions. Preparers falsely inflate deductions or expenses on a tax return so that the taxpayer will pay less than they owe or receive a larger refund.
- Falsifying Income to Claim Credits. Con artists convince taxpayers to invent income to qualify for tax credits, such as the Earned Income Tax Credit (EITC).
- Frivolous Tax Arguments. Taxpayers attempt to avoid paying taxes by claiming that the collection of a federal income tax is illegal. Such claims have been thrown out in court many times.
- Abusive Tax Shelters. Criminals create and sell complex tax avoidance schemes.
- Offshore Tax Avoidance. Taxpayers attempt to hide assets and income in offshore accounts to avoid paying taxes.
Here’s a closer look at some of these scams which may involve preparers serving the public.
Return Preparer Fraud (#4)
Return preparer fraud may take many forms and might involve any of the above-listed scams. People who prepare tax returns for compensation are required 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 considered fraud.
A fraudulent preparer may also sell the identities of their clients since they have access to information such as names, addresses, birth dates, and Social Security numbers that can be used to steal someone’s identity or file a false return.
Inflated Refund Claims (#6)
Anything that reduces taxable income or qualifies someone for exemptions or credits can result in an inflated refund claim. Look out for preparers who promise huge refunds without first reviewing your prior year’s return or current year’s tax documents.
According to the IRS, these scam artists advertise widely and may have phony storefronts to attract their victims. “They may even spread the word through community groups or churches where trust is high. Scammers frequently prey on people who do not have a filing requirement, such as low-income individuals or the elderly.”
These preparers might even file a false return in the person’s name and collect a refund the taxpayer doesn’t know was issued. When these fraudulent returns include false income, victims can lose their federal tax benefits, such as Social Security or low-income housing benefits.
Legitimate tax preparers will always give you a copy of your return as it was filed and will never deposit your refund into their bank account. Watch out for tax preparers who offer to deposit your refund into their own account. Often, they deduct a hefty fee before turning your refund over to you.
Falsely Claiming Deductions & Credits (#7-9)
Unscrupulous tax preparers have several methods to fraudulently boost tax refunds or minimize balances due for their clients. This may include claiming refunds for which the taxpayer is not eligible, falsely inflating deductions, or inventing income to qualify for tax credits, such as the EITC.
Some of these scams originate with the preparer. Other times, they’re initiated by the taxpayer and slip through because the preparer did not do their due diligence.
Keep in mind that you are responsible for what is on your tax return, even if someone else prepares it. Filing an incorrect return can result in disallowed deductions and credits, significant penalties, and even criminal prosecution.
Frivolous Tax Arguments (#10)
The IRS provides several examples of frivolous tax arguments, including:
- You can refuse to pay taxes on religious or moral grounds
- Filing a tax return or paying federal income tax is voluntary
- You can reduce your tax liability by filing a “zero” return
- If you don’t file a tax return, the IRS must prepare one for you
- The only people subject to federal income tax are employees of the federal government
Time and again, these arguments and other outlandish claims have been thrown out of court. The bottom line is that you must pay your fair share of federal taxes.
Abusive Tax Shelters (#11)
Accountants, financial planners, and others may promote abusive tax shelters as a method for avoiding taxes. While tax law generally allows businesses to create “captive” insurance companies to protect against certain risks, promoters of illegal tax shelters persuade owners of closely held businesses to participate in schemes that aren’t designed to insure the company against risks, but rather to evade the IRS. If something sounds too good to be true, seek out an independent opinion.
How to Find a Reputable Tax Preparer
How do you protect yourself from these tax-related scams? By choosing your tax preparer carefully.
Given the complexity of tax law and the fact that tax preparers have access to so much of their clients’ personal information, you might assume that becoming a paid tax preparer would entail meeting certain requirements for education, experience, or even undergoing a background check. Unfortunately, this isn’t the case.
Almost anyone can start a tax preparation business; they just have to apply for a free PTIN from the IRS. Whoever you hire to prepare your tax return should, at a minimum, have a PTIN. Here are some other tips to follow.
1. Check the IRS Directory
The IRS maintains a directory of PTIN holders who currently hold credentials recognized by the IRS (such as CPAs, enrolled agents, and attorneys) or who have completed the Annual Filing Season Program (voluntary continuing education courses covering federal tax law and ethics held each year). Almost anyone can have a PTIN, but the professionals in this directory tend to have more skill, education, or experience.
2. Investigate Marketing Claims
Be very wary of tax preparers who promise they can get you a larger refund than their competitors.
3. Examine Preparer Fees
Most tax preparers charge either a flat fee or an hourly rate. Avoid working with preparers whose fee is a percentage of your refund. This fee structure gives them an incentive to overinflate your refund by claiming false expenses, deductions, or tax credits.
4. Review Your Return Before Filing
If a preparer asks you to sign a blank return, refuses to give you a copy of your tax return, or won’t allow you to see your return before it’s filed, those are big red flags. They’re also violations of Circular 230, the regulation that governs professionals who practice before the IRS. You can report a tax return preparer for improper tax practices by completing Form 14157 (Return Preparer Complaint) and sending it, along with supporting documentation, to the IRS.
5. Ask About Year-Round Availability
Some preparers set up shop during tax season and disappear shortly after April 15th. If something goes wrong, you may need your preparer to help you answer questions or clarify issues months or even years after your return is filed. If they’re not around, they won’t be much help. Look for someone who’s available year-round.
6. Check Preparer Credentials
When searching the IRS directory for credentialed tax preparers, know that not all credentials are created equal. Only tax attorneys, CPAs, and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collections, and appeals. Participants in the Annual Filing Season Program may only represent you for a return they personally complete and sign. This means that if you have issues from prior years, they can’t legally help.
7. Ask About Professional Affiliations
Many tax professionals belong to professional associations that provide continuing education and ethical guidelines. The IRS maintains a list of recognized tax professional association partners. Membership in one or more of these organizations doesn’t automatically mean the preparer is legitimate, but many fly-by-night preparers won’t want to pay the money to join.
8. Expect Your Preparer to Be Thorough
Make sure your preparer asks to see documentation, forms, and receipts and asks a lot of questions. This helps them determine whether you qualify for different tax breaks and how to classify your expenses. It also helps you avoid penalties later. If your tax preparer asks few questions or none at all, it’s a cause for concern.
9. Check Your Tax Return Before It’s Filed
You are responsible and liable for the contents of your tax return, even if someone else fills it out. Never sign a tax return before checking that it’s accurate.
If you’re not sure about something, don’t sign your return. Ask the preparer to clarify any income, deductions, or tax credits you don’t understand. When you sign the return, you’re asserting under penalty of perjury that it’s complete and accurate.
This tax season, keep your eyes open and don’t let the promise of low fees or a big tax refund keep you from doing a thorough check on your tax preparer. No cost savings or windfall refund can make up for the headache of having your identity stolen or getting audited by the IRS, especially if your shady tax preparer is long gone by the time you realize something is wrong. Hire a reputable tax professional, review their work carefully, and this tax filing season will be worry-free.
Have you encountered a shady tax preparer? What did you do?