When you hand over your taxes to a paid preparer, as over half of Americans do, you may assume they are qualified to understand the intricacies of tax law and get you the biggest refund that the law allows.
But a majority of those preparers have no professional credentials or oversight, and that’s allowed for major errors and unscrupulous schemes that put taxpayers at risk for audits and large penalties.
Two reports — one from the Government Accountability Office and the other an investigation by the Center for Taxpayer Rights — shed light on this problem within the tax-prep industry. These unregulated preparers are costing the federal government “billions of dollars in improper claims,” according to the GAO report.
Tax attorneys and certified public accountants, of course, do have to meet educational and competency requirements. The IRS also offers a voluntary program that involves continuing educational classes, including a refresher course on tax law. But you don’t need professional credentials to obtain a Preparer Tax Identification Number (PTIN) and charge for preparing federal tax returns.
“You need credentials to do all sorts of stuff, to cut people’s hair, so why wouldn’t you have it for preparing a return when the consequences are so great?” said Nina Olson, who has advocated for formal regulation for years, first when she served as the IRS’s independent ombudsman and now as executive director of the Center for Taxpayer Rights.
Last year, her organization — in partnership with other groups — conducted 53 undercover visits in six states to test small, independent preparers. They discovered many lacked basic tax knowledge, such as who qualifies for which filing status. In one instance, the preparer labeled a return as married filing jointly, even though the tester specifically referred to her partner, with whom she was living, as her “boyfriend.”
After asking about reporting cash income, another tester wrote: “Preparer said I don’t have to report cash unless it is documented, that the IRS doesn’t mind.”
Returns routinely claimed incorrect calculations and refund amounts. The most “problematic” areas involved self-employed individuals and small business owners, Olson said. The investigation found that many preparers filed returns with fake business losses or padded expenses. One return included a fictitious business deduction for employees’ wages in the amount of $4,000.
Often the clients may not be aware that a preparer’s actions have led to an unrealistically high refund.
“If preparers are incompetent or, worse, fraudulent, taxpayers are responsible for the additional taxes, interest, which compounds daily, and penalties,” Olson said. “Meanwhile, the IRS rarely imposes penalties on preparers and actually collects less than 20 percent of those penalties. So the risk and burden is all on the taxpayers.”
Fraudulent and inaccurate returns hurt the people who can least afford to be hit with back taxes and penalties, she said.
“The clients of these preparers are disproportionately drawn from minority communities,” she said. “And thus these preparers raise the relative audit rate for Black taxpayers.”
The GAO report said its own testing has indicated that “in some circumstances these unregulated preparers can make errors at a higher rate than taxpayers who prepare their own returns.”
The issue is serious enough that the GAO has repeatedly recommended that Congress authorize the IRS to set a minimum professional standard for preparers. Olson argues that anyone paid to prepare returns should be required to register with the IRS, pass a competency exam to demonstrate their understanding of basic tax law, and complete annual continuing education to stay current with the constantly changing regulations.
There is some bipartisan momentum on Capitol Hill to address this issue. In February, Sens. Mike Crapo (R-Idaho) and Ron Wyden (D-Oregon) introduced the Taxpayer Assistance and Service Act, which creates a minimum standard for paid preparers. But despite the clear evidence that a lack of oversight leads to fraud and billion-dollar mistakes, Congress has yet to act.
Until there is more oversight, the full burden will be on taxpayers. So how do you know if you are dealing with a shady preparer? Here are some signs:
Refusing to sign your return
This is the hallmark of a “ghost preparer.” By law, any paid preparer must sign your return and include their PTIN. If you are asked to sign as “self-prepared,” that’s a huge red flag that the person is trying to avoid accountability.
Last year, a Vancouver, Washington, tax preparer was sentenced to 18 months in prison for inflating refunds. He fabricated medical expenses, charitable donations and even fake cars for business deductions, all without his clients’ knowledge. Just a sampling of his returns found he had cost the government more than $5 million. He left his name off the returns, leaving clients to face the consequences of his fraud.
Use the IRS directory of federal tax return preparersto check a professional’s credentials.
Fee based on your refund amount
Never hire a preparer whose fee is tied to the size of your refund. This creates an incentive for them to falsify your return to inflate the total.
A Long Island tax preparer pleaded guilty in January to filing false returns and faces $12 million in restitution. Her clients were charged over $1 million in fees, mainly because she took a percentage cut of the refunds she was inflating with fraudulently claimed credits and phantom dependents. In one instance, an undercover agent hired the preparer to prepare his return. He should have owed the IRS about $205. Instead, the preparer falsified a return that would have indicated a refund of more than $14,000.
Claiming unreimbursed work expenses
Even though most W-2 employees can no longer deduct unreimbursed work expenses, some uncredentialed preparers still try to sneak them in. In the Center for Taxpayer Rights report, several returns incorrectly claimed home office expenses, ranging from $2,400 to $9,600.
Requesting you sign a blank return
It’s important to realize that you are legally responsible for the accuracy of the information on your return, regardless of who filled it out. So, don’t sign a blank tax return. A preparer who encourages you to do so probably wants to hide that your refund is being inflated by phantom dependents or to fraudulently claim deductions or credits.
Always ask for a final copy of your return and carefully review it for inaccuracies.
Making up side hustle losses
Inflating business expenses is a common tactic used by unscrupulous preparers to offset your taxable income and increase the amount of your refund. If a preparer fabricates business deductions, you’ll be the one held responsible. The IRS frequently detects unreasonable business expenses mainly through automated systems.
“You just don’t want to get in the crosshairs of the IRS,” Olson said. “They have awesome collection power and it can mess you up financially for years.”
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