The April 15th deadline for filing taxes has just passed. Many of you got your taxes submitted on time and some of you probably filed extensions giving you until October 15th to file your return. A lot of you had someone else prepare your tax returns for you. Because we all hate paying taxes, there is often the temptation to use a preparer that promises higher refunds, sometimes suggesting deductions that may not be legitimate. Making the choice to use a dishonest tax preparer can put you and your business at risk.
- A federal jury in Cincinnati convicted Walter L. Daulton, a 62-year old self-described truck tax expert, on charges of assisting in the preparation of fraudulent income tax returns. On many of his clients' returns, he reported numerous fictitious expenses that his clients had neither paid nor incurred.
- The Government Accountability Office (GAO) did a study of 19 chain commercial tax return preparation firms and found only two of the 19 tax return preparers had the correct tax liability and refund amounts on the returns they prepared. All 19 tax return preparers made a mistake on the prepared returns.
- The Treasury Inspector General for Tax Administration (TIGTA) secretly shopped 28 un-enrolled tax preparers in large metropolitan areas. Seventeen of the tax return preparers did not show the correct amount of tax owed or refund due on the returns they prepared. No tax return preparer correctly calculated the expenses relating to self-employment income.
- It was discovered during confirmation hearings that the future Treasure Secretary and head of the IRS, Tim Geithner, failed to pay taxes on income in 2001, 2002, 2003 and 2004. Mr. Geithner blamed the error on the tax software he used to prepare his return.
- A Pennsylvania tax preparer was sentenced to seven years in prison and ordered to pay $216,000 in restitution for filing false tax returns. Numerous clients were audited and forced to pay interest, penalties, and additional tax. [The preparer] had kept a portion of their returns, sometimes receiving $2,500 for preparation.
- A Social Security Administration employee who moonlighted as a tax preparer for Jackson Hewitt was indicted Wednesday in Little Rock for preparing false returns, fraudulently using Social Security numbers and identity theft.
Each of the above items is an excerpt from a real news story, a few of the many stories that are reported across the country every day as the IRS steps up its efforts to ensure paid tax return preparers are assisting clients appropriately. But, as the above articles point out, the responsibility does not rest solely with the tax preparer.
If you use a dishonest or untrained preparer and submit false or fraudulent returns, you could be hit with additional taxes, interest, penalties and possibly even face criminal prosecution.
The IRS estimates that 900,000 to 1.2 million people prepare tax returns for a fee. Yet these financial advisers have no requirements for certification, and many have never been tested. Due to the thousands of cases of tax fraud and abuse like those mentioned above, the IRS has finally decided to take action.
Beginning in 2011 for the 2010 filing season, the IRS will begin to regulate all untrained preparers that do not hold a professional designation. Untrained preparers will be required to complete the following:
- Register with the IRS
- Pass a Competency Exam
- Complete Continuing Education on an ongoing basis
- Comply with IRS Ethical Standards
If fraud or error is detected, all returns prepared by that tax preparer can be subject to audit. If this turns out to be your preparer, the best you can hope to experience is the hassle of an audit. The worst could be interest, penalties and additional taxes owed because your return was prepared incorrectly. And if you knowingly submitted a fraudulent return, then you could also face criminal prosecution.
The IRS offers these tips to keep in mind when picking your tax return preparer:
- Be wary of tax preparers who claim they can obtain larger refunds than others.
- Avoid tax preparers who base their fees on a percentage of the refund.
- Use a reputable tax professional who signs the tax return and provides you a copy.
- Be sure the individual or firm will be around after the return has been filed to answer questions
- Question any tax preparer that encourages you to take deductions that are not supported by documentation.
- Find out if the preparer is affiliated with a professional organization that holds them to a code of ethics.
Remember, you are legally responsible for what is on your tax return, even if those returns are prepared by someone else. Don't wait until 2011 to find out if your tax preparer is acting in your best interests.