Beware of the Tax Preparer Promising Huge Refunds

Mar 21, 2024

Tax season always brings the promise of refund checks for millions of Americans. But some shady tax preparers use that excitement to their advantage, making outrageous guarantees of inflated refunds to lure in clients. They falsify information on returns to justify the artificially high refund amounts. This unethical and illegal behavior hurts not only the clients who trusted them, but also cost the government billions in lost tax revenue each year.

The Schemes Preparers Use

There are a variety of underhanded tactics dishonest preparers employ to inflate refunds. A common one is creating fictitious or exaggerated business expenses and losses to reduce reported income. They might also fabricate deductions and tax credits the client doesn’t actually qualify for, such as the Earned Income Tax Credit (EITC) for low-income filers. Another devious strategy is reporting income in the wrong year to take advantage of coding differences between the software program and IRS processing system.

In some cases, preparers tell clients to simply not report all their income, whether it’s from a job, self-employment activities, investments, or other sources. They assure the client it’s a legitimate way to reduce their tax burden. Of course, intentionally omitting income is tax fraud.

Another red flag is if a preparer wants to receive the refund themselves instead of you, the client. They’ll have you provide direct deposit details for an account they control. Once the inflated refund comes in, they’ll pocket the excess amount over what you were actually owed.

The Consequences Are Severe

While these schemes help line the pockets of the dishonest preparers, the consequences for clients are dire if they get caught. You can be assessed hefty accuracy-related penalties of a certain percentage of the understated tax, as well as having to repay any excess refund received, plus interest. In egregious fraud cases, you could even face criminal tax evasion charges and potential jail time.

Even if you were unaware the preparer falsified your return, you are still legally responsible for all information contained on it. The classic line “My preparer made a mistake!” does not get you off the hook with the IRS. You sign the return under penalty of perjury, so you own any mistakes or misrepresentations.

A Cautionary Tale from Baltimore

The consequences of tax preparer fraud were real for clients of a Baltimore tax business. In late 2022, one of the former owners of the business was sentenced to 27 months in federal prison for orchestrating a massive fraud scheme from 2011 through 2019.

Prosecutors stated his business prepared over 1,000 fraudulent returns that claimed inflated or fictitious business losses and itemized deductions. This resulted in clients receiving $4.7 million in excessive refunds they weren’t entitled to.

In addition to the prison sentence, the owner was ordered to pay $4.9 million in restitution to the IRS and forfeit another $659,000 from proceeds of the fraud. All for the lure of charging higher preparation fees based on the excessive refund amounts his clients received.

Multiple former business clients who received fraudulent refunds were also charged and convicted of making false claims against the government. Their punishments included prison time, supervised release, restitution to the IRS, and being barred from ever working as tax preparers again.

How to Spot a Shady Preparer?

To avoid falling victim to dishonest tax preparers, look out for these five major red flags highlighted by the IRS:

• The preparer doesn’t have or won’t provide you with a valid Preparer Tax Identification Number (PTIN). By law, any paid preparer must have one and provide it on returns they complete.
• The preparer refuses to sign the tax return they prepared for you. Legitimate preparers sign their work as proof they stand behind it.
• The preparer bases their fee on a percentage of your refund amount, rather than a flat fee or hourly rate. That creates an incentive to inflate the refund total.
• The preparer promises or guarantees you’ll get a large refund without first reviewing your full tax situation. Refund amounts can’t be assured blindly.
• The preparer wants to direct all or part of your refund into an account they control, rather than one in your name. That allows them to siphon off portions of the refund.

What to Do If You Were Scammed

If you suspect your preparer of misconduct, report it immediately to the IRS. Even if you were unaware of the fraud when the shady return was filed, you could be considered an accomplice if you don’t correct it.

The forms to submit are the Tax Return Preparer Fraud or Misconduct Affidavit (Form 14157-A) and the Complaint: Tax Return Preparer (Form 14157). Provide all details of the actions you believe constitute fraud or misconduct by the preparer. The IRS will investigate your complaint.

You’ll likely need to file an amended return to correct any fraudulent entries made originally. Depending on the severity, you could face penalties, back taxes, interest payments, and even criminal charges. The key is to take prompt action as soon as you discover something is amiss.

The Importance of Selecting Legitimate Help

Tax preparation is a largely unregulated industry, with no standardized credentials or educational requirements in most states. That makes it easier for unscrupulous operators to take advantage. When you hire a preparer, you are putting your financial life in their hands and trusting them implicitly. Make sure that trust is well-placed.

Always ask for referrals and check online reviews before selecting a preparer. Briefly interview candidates about their experience level and familiarity with your particular tax situation. Ensure they have an active PTIN and will actually sign your completed returns. Discuss their fees upfront and avoid anyone who tries to base them on your refund amount.

The best preparers will ask to see documentation for all your income sources and potential deductions to maximize your legitimate credits and deductions. They’ll explain the rules to you and ensure you only claim what you truly qualify for. A good preparer earns their fee by providing tax expertise and due diligence, not by promising outlandish refunds.

You can also opt to have your return prepared at a free tax help, if your income qualifies. The IRS partners with organizations across the country to offer its Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs. IRS-certified volunteers staff these clinics and can prepare simple tax returns for low-to-moderate income taxpayers, ensuring they receive all the credits and deductions they’re entitled to while playing by the rules.

At the end of the day, your tax return is a legal document you’re signing under penalty of perjury. Don’t let shady tax preparers jeopardize your financial wellbeing or freedom with unethical schemes that could potentially land you in hot water with the IRS. Do your due diligence, ask questions, and walk away from any preparers making outlandish refund claims or operating in a questionable fashion. It’s the best way to protect yourself from becoming an accomplice to tax fraud.

Source – https://www.washingtonpost.com/business/2024/03/06/irs-tax-preparer-fraud/