Many taxpayers have been unwitting victims of unscrupulous tax preparers in the past decade, but the IRS and federal law enforcement have done little to crack down on them, The Washington Post reported.
Many of these taxpayers are low-income, and they are penalized by the IRS for falsehoods that the preparers claim on their returns, such as dependents who do not exist or income that was never earned. These preparers do that to maximize the filer’s refund, which earns them a larger fee.
The complaints of more than 112,000 taxpayers who reported fraud or misconduct by their tax preparers over the past decade included preparers editing taxpayers’ returns without the taxpayers' consent, making up dependents, adding income that did not exist, and faking W-2s and other documents to increase refunds.
When the IRS sends the filer a letter demanding repayment plus penalties, many of them “are surprised, if not downright flabbergasted” to learn about the claims in their returns, said Alabama lawyer Maceo Kirkland, who represents low-income people with tax problems, in an interview with the Post. They did not realize their refunds were larger than what they should have received, and often they have already spent the money.
Lawyers and advocates who work with low-income taxpayers told the Post that many do not know about the IRS's return preparer complaint and fraud and misconduct affidavit to report such fraud. More than 11,000 taxpayers reported misconduct by their preparers in fiscal year 2018, the most recent year for which data is available, the Post reported. The IRS penalized 2,292 preparers for “willful or reckless conduct” or for rule violations, such as turning in a return without signing it.
The IRS disbars just one or two preparers a year and suspends fewer than 70 annually for any reason, though often for this type of fraud, the Taxpayer Advocate Service told Congress, the Post reported.
“In November 2020, the IRS developed a service-wide strategy regarding return preparers and began implementing critical technological and procedural advancements,” the IRS said in a statement to the Post. “Certain return preparer penalty cases are now centralized to more consistently and efficiently develop and assert return preparer penalties.”
The IRS emphasizes that the taxpayer has a legal responsibility to read over his or her own returns.
In a 2018 report to Congress, the IRS’s Taxpayer Advocate Service identified unregulated preparers as one of the “most serious problems” with the nation’s tax regime. A 2014 Government Accountability Office (GAO) report found that 55 percent of all tax preparers have no formal credentials and are not subject to any IRS regulation. Those preparers were significantly more likely to make false claims, whether due to unintentional mistakes or intentional misconduct, than taxpayers who filled out their tax returns on their own, according to the Post.
Taxpayers can look up preparers’ credentials in a federal directory.
Legislation to regulate the industry has not made it through Congress, leaving Oregon as the only state that requires paid tax preparers to pass a test to stay in business. But some told the Post that such regulation would mostly benefit professional accountants.
“Overwhelmingly, the average tax preparer is doing their very, very best to produce accurate returns,” New York attorney Patrick Mullen told the Post. He represents preparers who are audited or investigated. “The ones that go astray, they overstate deductions that shouldn’t be there. Whether you have regulation or you don’t have regulation, that’s going to exist. The unscrupulous are going to do whatever they have to, whether you have regulation or not.”
For a broad spectrum of highlights regarding individual tax return preparation, attend the Foundation for Accounting Education’s two-day 1040 Individual Tax Tune-Up Webcast on Nov. 1 at and Nov. 2.