How Taxpayers Can Avoid Preparer Fraud

Paid tax return preparers are acutely aware of increased IRS scrutiny of their industry. The IRS has recently issued an announcement aimed at clients of return preparers enlisting their help in reducing tax return preparer fraud and warning them that they are responsible for what is submitted on their behalf to IRS.

The vast majority of preparers are good, honest professionals, but as usual, a few “bad apples” have forced the IRS to address the fraudulent and other illegal activities of unscrupulous members of the tax return preparer community. These activities involve the preparation of fraudulent returns generally by claiming false business and personal tax deductions and credits, such as the Earned Income Credit. Many times the taxpayer or client is not even aware of the fraud. Nevertheless, taxpayers and not the preparer are liable for the additional tax, interest and penalties. The taxpayer may also have to pay for professional assistance in representing him or her before the tax examiners. Tax fraud can also be a crime, punishable by imprisonment and hefty fines.

In its announcement, the IRS delineated numerous ways in which taxpayers can avoid tax preparer fraud. First of all, clients should review their tax returns and question entries they are not familiar with. They should never sign a blank return and never use a preparer who charges a fee based upon a percentage of the refund. Be especially wary of preparers who promise a larger refund than other tax return preparers. Make sure the preparer signs the tax return (as required by law) and provides a copy.

Clients should also do some research on their potential preparer. Only CPAs, Attorneys and Enrolled Agents can represent clients in all matters related to federal income taxes such as audits, appeals and collection issues. Other tax return preparers, which may be as competent as CPAs, Attorneys and Enrolled Agents, can only represent taxpayers for audits of returns prepared by them. Taxpayers should also take into consideration whether the preparer will be around to answer questions about the return several years after the return has been filed. The IRS can audit tax returns generally until three years after it has been filed
(Six years for potential fraudulent returns). Finally, clients should inquire as to what professional organizations their preparer is affiliated with. Most professional organizations require its members to obtain continuing education credits and to adhere to it’s code of ethics.