Why the IRS Won't Refund Victims of Tax Preparer Fraud

— -- If you're a victim of tax preparer fraud, don't rely on compensation from the Internal Revenue Service. The agency is not prohibited from issuing refunds to such victims, but it has no procedures to do so, according to warnings from National Taxpayer Advocate Nina Olson.

But it’s a different matter when it comes to victims of tax identity theft. When someone uses your personal information, such as a Social Security number, to steal your tax refund, you could get a refund from the IRS.

Olson, who heads the U.S. government Office of the Taxpayer Advocate, argues there's little difference between that crime and that of tax preparer fraud.

About 60 percent of taxpayers use tax professionals to prepare their returns, according to the IRS.

"The IRS has known about this problem and its severe impact on victims for many years," since at least 2000, Olson wrote in a report presented to Congress today. She presented her 2014 annual report to Congress in a hearing before the House Subcommittee on Government Operations.

The IRS commissioner decided in March 2014 that the IRS will issue refunds to victims of tax preparer fraud who provide a copy of a police report.

"It has now been over a year since the Commissioner made this decision, and the IRS still has no procedures in place to implement this policy," Olson writes. "The IRS has not even circulated draft procedures for TAS (Taxpayer Advocate Service) to review and comment upon."

A spokeswoman for the IRS said commissioner John Koskinen has long advocated for better mechanisms for enforcement and taxpayer solutions. When the IRS named tax preparer fraud as one of its annual "dirty dozen" tax scams, it said the IRS Criminal Investigation works closely with the Department of Justice to end scams and prosecute criminals.

"The IRS has been taking steps to help taxpayers know where and how to get the help they need," Koskinen said two weeks ago during a speech at the National Press Club. "We’ve also been working with the national tax groups, including some of those here in the room, on raising taxpayer awareness about the different types of tax professionals available to help."

The IRS launched a new directory of tax return preparers on IRS.gov earlier this year, allowing taxpayers to find tax professionals with credentials and qualifications in their local area.

Suraj Patel, New York University Stern School of Business adjunct professor, said the problem of enforcement and refunding victims of tax preparer fraud is a symptom of a much larger problem.

"No politician ever gets votes by advocating for a higher IRS budget, so years of cuts have really led to a situation where the agency can't possibly adequately handle the helpline or do proper enforcement," Patel said. "On the other hand, it also goes to show how complicated and burdensome the annual filing of taxes has become. It's a huge externality on the economy."