Tax Preparer Fraud – The Real Deal

When our office gets a “takeover client” there are a series of steps that we perform.  In addition to the normal verification of identity, organizer completion and client interview, we also request a copy of the prior year return for review.  We do this to obtain a glimpse into the clients history, but we also look to see if potential mistakes were made.  Occasionally we find something that should be changed.  Hey, tax preparers are human too and sometimes mistakes are made.  But then, there are people like these who aren’t making mistakes, but are out to make a quick buck.

So, most people think of tax fraud as fudging the numbers a little.  But the reality is it often involves the calculated manipulation of the entire return to generate a false refund.  Okay, so what is the benefit to the tax preparer in doing this?  The short answer is they get to charge a larger fee for their services and there will be less likelihood of the client balking because of the magnitude of the refund.  This is particularly true if the preparer has a banking relationship that allows them to withhold their fees from the refund proceeds.  So let’s look at the mechanics of how this works.

Client comes in and wants their return prepared.  Let’s say they are also one of those 1) I need my money yesterday and 2) I am looking for a big refund.  Okay, fair enough.  Now let’s say that the preparer is one of those 1) we can get your money fast and 2) we’ll get you the biggest refund you’ve ever seen.  Now this is where the interaction gets a little dangerous.  Why?  Because the scene is set for the preparer to potentially do things they shouldn’t and the client to turn a blind eye to things that they really should not ignore.

So what does the preparer do?  The options are numerous.  They could create fictions losses on Schedule C to reduce wage income to acceptable levels to claim the Earned Income Credit (EIC).  They could create fictitious income on Schedule C to give a client who doesn’t work income so they can claim the EIC.  Wage income could be reduced by bogus stock losses, falsely generated unreimbursed business expenses, nonexistent charitable contributions, etc. 

So what is the end result?  The client is often presented with a return where they are “guided” to the refund amount.  The client is happy with what they are getting right?  Typically, thus the reason they are okay with paying a fee that represents 4-10% of the refund.  The disheartening aspect of this is that a $450 fee for a person who is getting a $4,500 refund is nowhere near warranted nor realistic.  A $450 fee is one that is mostly associated with “complex” returns; meaning those that take a few days to work on and involve a lot of leg work.

So what’s the point of all this?  Well, it’s twofold.  Firstly, we all need to be aware that there are fraudulent tax preparers out there.  Some will perform the above to keep a client while others will do it to get a nice check.  If you figure that your average retail tax office does about 400 returns per season, if they are charging $450 for each of them, that makes for a nice $180K season.  Secondly, if you encounter one of these preparers, you need to know that the responsibility for your return ultimately lays with you the taxpayer.  While the IRS and Department of Justice will typically lock up a fraudulent preparer, they will come to you to get their money back.  Furthermore, like we always say, the US Government never loses so it’s best to just do the right thing at the outset. 

Until next time.