IRS Warns of Tax Preparer Fraud

The Internal Revenue Service's April 15 deadline is looming and you're stressed. An old friend swears by his accountant, who has an uncanny ability to secure a fat refund.

But filers beware -- accountants, lawyers and other tax preparers may be committing fraud to goose clients' returns without permission, often to generate word of mouth business. That's what the federal government is warning these days as it shifts more resources toward investigating tax preparer fraud and regulating this cottage industry of small firms and one-man shops.

VIDEO: Mellody Hobson offers advice on finding a credible tax preparer.
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Meanwhile, the IRS, along with the Department of Justice, has just announced a string of recent actions. Among them:

*A civil injunction suit filed earlier this month against Lancaster Tax Service in Orlando, Fla., in which the Justice Department alleges preparer Elisa Veronica Barron knowingly misrepresented her customers' filings by making false or overstated deductions.

*In Miami, Santiago Investment & Consulting stands accused of falsely claiming for clients a first-time home buyer tax credit despite the absence of any purchased homes. The government last week asked a federal court to shut Santiago down permanently.

*Kansas City, Kan.,-based preparer Donald Bushnell this past fall was sentenced to 36 months in prison for filing nearly 300 returns fraudulently claiming more than $1 million in nonexistent business losses, according to the IRS.

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New Rules Pending

Testifying March 16 before the House Ways and Means Subcommittee on Oversight, Nina Olson, the IRS's national taxpayer advocate, said she began calling for preparer regulation back in 2002 because she had seen first-hand "how incompetent or unscrupulous preparers harmed taxpayers who trusted them and how their actions undermined tax compliance."

In January, the IRS announced it was in the process of implementing new rules to better regulate tax preparers who are not certified public accountants as a way to root out unqualified or fraudulent operations, including requiring non-CPA preparers to furnish an identification number for each return they prepare. Regular testing of non-CPA preparers to ensure they are properly qualified is also being proposed.

Preparer Probes on Rise

Since 2001, the Justice Department's tax division has obtained more than 400 injunctions alleging tax preparer fraud. In the past three years, the IRS has launched more than 600 investigations into tax preparers suspected of falsifying information.

First and foremost, IRS officials warn, if the return seems too good to be true, it probably is.

"Tax schemes are illegal and can lead to imprisonment and fines for both scam artists and taxpayers," IRS Commissioner Doug Shulman said in a statement earlier this month. "Taxpayers pulled into these schemes must repay unpaid taxes plus interest and penalties."

Tax evasion is a risky crime, a felony, punishable by five years imprisonment and a $250,000 fine, so individuals need to choose a return preparer carefully, the IRS said.

Choose Preparers Carefully

Here, according to IRS spokesman Dean Patterson, is a checklist of helpful hints when picking 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.

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