Tax preparer fraud is a serious violation where a tax professional knowingly misrepresents information on your tax return to unlawfully minimize your tax liability or maximize your refund. This illegal activity can expose you to costly IRS penalties, interest, and even criminal prosecution despite your possible ignorance of the fraud.
Common Methods of Tax Preparer Fraud
Fraudulent preparers use various deceptive strategies including:
- Inflating Deductions and Expenses: Claiming fictitious business expenses or charitable donations to reduce taxable income.
- Creating Fake Dependents: Inventing dependents to claim credits like the Child Tax Credit or Earned Income Tax Credit.
- Identity Theft and Phishing: Using your personal information without consent to file fraudulent tax returns or commit other financial crimes.
- Failing to Sign Returns or Provide Copies: Legitimate preparers sign your return and provide you with a copy. Avoid “ghost preparers” who refuse to do so.
- Charging Excessive Fees Based on Refund Size: Fees tied to refund percentages incentivize preparers to inflate refunds illegally.
- Misusing Personal Data: Using your information to open credit lines or loans without your knowledge.
Who is Most Vulnerable?
Certain groups are more at risk, including individuals with limited English skills, elderly taxpayers, low-income earners who qualify for refundable credits, small business owners, and anyone seeking unusually large refunds or low-cost preparation.
Real-World Warning Signs
Watch out for red flags such as:
- Promises of guaranteed maximum refunds.
- Preparers who disappear after receiving payment or refuse to provide your tax return copy.
- Unbelievable deductions like claiming pets or unrelated personal expenses.
- Cash-only payment demands without receipts.
- Requests to sign blank tax forms.
How to Avoid Tax Preparer Fraud
- Choose preparers with credentials such as enrolled agents, CPAs, or attorneys. Verify their status through the IRS Directory of Federal Tax Return Preparers.
- Check preparer records using resources like the Better Business Bureau.
- Never sign a blank or incomplete return; review all information carefully.
- Question unusually large refunds without clear explanations.
- Understand and agree on fees upfront; avoid percentage-based fees.
- Always obtain a signed copy of your completed return.
- Report suspicious preparers to the IRS using Form 14157 if needed.
Legal Responsibilities and Consequences
Regardless of your awareness, as the taxpayer, you are ultimately responsible for the information on your tax return. If fraud is detected, the IRS can impose back taxes, penalties, and interest, and even pursue criminal charges in severe cases. Being proactive and informed is your best defense.
Further Reading
Learn more about the importance of the Preparer Tax Identification Number (PTIN) which tax preparers must include on your return.
For official guidance on reporting suspicious preparers, visit the IRS page on Making a Complaint About a Tax Return Preparer.
Sources
- Internal Revenue Service. “Make a Complaint About a Tax Return Preparer.” https://www.irs.gov/tax-professionals/make-a-complaint-about-a-tax-return-preparer
- Internal Revenue Service. “Tax Scams / Consumer Alerts.” https://www.irs.gov/newsroom/tax-scams-consumer-alerts