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How to Choose a Tax Preparer and Avoid Preparer Fraud

Regardless of who did what, it's the taxpayer who ultimately will be held responsible.

Return preparer fraud involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. Preparers may, for example, manipulate income figures to fraudulently obtain tax credits, such as the Earned Income Tax Credit.

In some situations, the client, or taxpayer, may not know of the false expenses, deductions, exemptions and/or credits shown on his or her tax return. When the IRS detects a fraudulent return, the taxpayer — not the return preparer — must pay the additional taxes and interest and may be subject to penalties.

The IRS Return Preparer Program focuses on enhancing compliance in the return-preparer community by investigating and referring criminal activity by return preparers to the Justice Department for prosecution. The IRS can also assert appropriate civil penalties against unscrupulous return preparers.

While most preparers provide honest service to their clients, the IRS urges taxpayers to be careful when choosing a preparer –– as careful as they would be choosing a doctor or lawyer. Even if someone else prepares a tax return, the taxpayer is ultimately responsible for all the information on the return. For that reason, taxpayers should never sign a blank tax form. And they should review the return before signing it and ask questions on entries they don’t understand.

Helpful Hints When Choosing a Return Preparer

» Be cautious of tax preparers who claim they can obtain larger refunds than other preparers.

» Avoid preparers who base their fee on a percentage of the refund.

» Use a reputable tax professional who signs the tax return and provides a copy.

» Consider whether the individual or firm will be around to answer questions about the preparation of the tax return months, or even years, after the return has been filed.

» Check the person’s credentials. Only attorneys, certified public accountants (CPAs) and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.

» Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.

» Ask family and friends whether they know anyone who has used the tax professional and whether they were satisfied with the service they received.

Reputable preparers will ask to see receipts and will ask multiple questions to determine whether expenses, deductions and other items qualify. By doing so, they are trying to help their clients avoid penalties, interest or additional taxes that could result from an IRS examination.

Tax evasion is a risky crime, a felony, punishable by five years imprisonment and a $250,000 fine. In 2008, for instance, the IRS initiated 214 criminal investigations for suspected return preparer fraud, recommended prosecution in 134 of the cases and secured 142 indictments. Of that total, 124 individuals were sentenced to prison and served an average of 18 months. Additionally, the courts have issued more than 290 permanent injunctions against abusive tax scheme promoters and abusive return preparers since 2001.

Reporting Suspected Tax Fraud Activity

Tax fraud or abusive return preparers can be reported to the IRS on Form 3949-A, Information Referral. Click here to download the form or call 800.829.3676 to order by mail. The completed form, or a letter detailing the alleged fraudulent activity, should be sent to Internal Revenue Service, Fresno 93888.

The mailing should contain specific information about the individual or business, the activity, when the alleged violation took place, the amount of money involved, how the reporter became aware of it and any other information that might be helpful to an investigation. The identity of the person filing the report is not required but it could be helpful in an investigation and it can be kept confidential.

Rewards based on the amount of additional tax, penalties and interest owed can be made to individuals who report fraud. Click here to download Form 211, Application for Award for Original Information to claim a reward.

The IRS’ Whistleblower Office will make the final decision about whether an award will be paid and for how much. Award amounts are based on the value of the information provided compared with the amount of additional tax, penalties and interest collected by the IRS.

— Victor Omelczenko is an Internal Revenue Service media relations specialist.

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