Five Signs You Might Have a Bad Tax Preparer

March 25, 2011 — -- Kenneth Martin, a utility worker near Columbia, S.C., hired a Liberty Tax Service franchisee to file his tax returns in 2007 and 2008, not expecting any problems.

Martin, 57, had hired certified public accountants in previous years to file his tax returns without a glitch. So he was surprised when he later learned the South Carolina Department of Revenue was auditing him and his wife.

"I thought, 'Why?' I went to a professional tax service for advice on how to do my taxes," Martin said. "I'm all about paying what I owe."

The Martins filed a lawsuit against the Liberty Tax Service franchisee in 2009 and against the company in South Carolina district court in November. In their complaint, they said the firm inflated business expenses and produced false information about charitable donations.

The Martins also claimed the Liberty Tax Service office they hired did not follow through with a guarantee to assist them during the audit process.

The company guarantees "to give you the most accurate return and the largest possible refund. If we make an error in the preparation of your return that results in penalties and interests, we will pay the associated penalties and interest," according to the complaint.

The Martins filed a class-action suit with three other married couples who made related complaints against Liberty Tax Service. Liberty Tax Service would not comment to ABC News.

The IRS cautions that even if a preparer signs your tax form, you are responsible for the accuracy of your entire return. Last year, the IRS audited 0.9 percent of the 187 million tax returns filed for 2009.

The filing deadline is April 18 this year, and tax preparers say not to procrastinate. Keep in mind these five warning signs when trying to find an accountant:

1. Your tax preparer does not have a Preparer Tax Identification number.

According to the IRS, new regulations this year require all paid preparers, including CPAs and attorneys, to apply for a "PTIN" before preparing any federal tax returns in 2011.

About 190,000 CPAs have registered for the PTIN so far, said Edward Karl, vice president of taxation for the American Institute of Certified Public Accountants (AICPA). Of the AICPA's 370,000 members, about half work in public accounting, Karl said, and the "vast majority" of those CPAs focus on tax work.

2. A tax preparer makes blanket claims or guarantees a specific refund amount without knowing about your financial situation.

"If someone gives you a flat return amount or says something without knowing the parameters of your circumstances, I would say it is not reasonable," Karl said.

Factors that would affect tax preparation costs and the tax refund include marital status, the sale or purchase of a home, owning a business, getting divorced, children and education costs, Karl said. Also, employment in multiple states -- requiring multiple state filings -- can complicate the filing process.

3. Your tax preparer has a questionable history.

The IRS suggests you check for any disciplinary action and licensure status through state boards of accountancy for certified public accountants, the state bar associations for attorneys and the IRS Office of Professional Responsibility for enrolled agents.

For additional help, the IRS is hosting an Open House Saturday to help taxpayers at 100 IRS offices across the country.

But one of the most effective ways of finding a good tax preparer is to get a referral from someone you know and trust, Karl said.

"I can't emphasize that enough," Karl said.

Charles Miller, a spokesman for the tax division of the Department of Justice, said the department has seen hundreds of cases of illicit tax preparers referred by the IRS in the past decade.

The most expeditious response is to file a civil injunction to shut down the preparer's operations, Miller said. In some cases, the department could prosecute the preparer criminally.

Referrals From Someone You Know and Trust Might Be Best

If the Department of Justice chooses to seek an injunction against a preparer, the IRS will contact the preparer's clients.

4. Your tax preparer asks you to sign a blank tax form.

If the tax preparer used faulty means when filing a client's return, the client is usually not off the hook from paying penalties and interest after an audit, Miller said.

Therefore, it is important not to give a preparer free license with your signature.

5. Your tax preparer does not ask you to review the completed return before filing it.

"Whether they used a tax preparer who [filed inaccurately] intentionally or inadvertently, your liability remains the same," Miller said.

Utility worker Martin said he and his wife learned that lesson the hard way. Martin first used Turbo Tax computer software to start his tax return filing this year, and then paid an accountant about $187 to file his taxes as a safety precaution, he said.

"I double insured myself this time," Martin said, who said he paid Liberty Tax Service 1 1/2 to two times as much as he paid the accountant. "I'm so gun-shy now I don't know who to trust."