How to Handle a Tax Preparer Fraud Case

Tax preparer fraud occurs when an individual or company intentionally falsifies a tax return. These fraudulent preparers exploit the complexities of the tax code to their own advantage, often leaving unsuspecting taxpayers to face audits, penalties, and significant debt.

Common Tax Preparer Fraud Schemes

A frequent tactic used by dishonest preparers involves artificially inflating deductions and expenses to lower a client’s taxable income. This might include fabricating or exaggerating claims for charitable contributions, medical expenses, or unreimbursed employee business expenses. The preparer may do this without the taxpayer’s knowledge, presenting them with a final return that shows a much larger refund than they are legitimately entitled to receive.

Another prevalent scheme is the improper claiming of tax credits. Fraudulent preparers may invent dependents or falsify information to make a client eligible for credits like the Earned Income Tax Credit (EITC), the Child Tax Credit, or education-related credits. For instance, a preparer might claim a niece or nephew who does not live with the taxpayer as a qualifying child. These credits are a common target for manipulation because they can result in substantial refunds.

Some fraudulent preparers create fictitious businesses on a client’s return to report non-existent losses. These “Schedule C” losses are then used to offset the taxpayer’s other income, such as wages from a job, thereby reducing the overall tax liability and generating a fraudulent refund. The taxpayer is often unaware that a fake business has been included on their return until they are contacted by the IRS.

Some preparers illegally divert all or part of a client’s tax refund. They might alter the bank account information on the tax return, directing the refund to an account they control. The preparer may then provide the client with a smaller, fake refund check, keeping the difference. This is often accomplished by having the client sign a blank or incomplete return, which the preparer later alters.

Identifying Warning Signs of a Fraudulent Preparer

A preparer who promises a guaranteed or unusually large refund before thoroughly reviewing your financial documents is a warning sign. A refund amount can only be determined after a careful analysis of income, deductions, and credits. A promise made upfront is a strong indication that the preparer may be willing to bend or break the rules to deliver on that promise.

The IRS requires all paid tax preparers to have a valid Preparer Tax Identification Number (PTIN) and to sign the returns they are paid to complete. A refusal to sign the return or provide a PTIN is a red flag, as the preparer may be attempting to avoid accountability. You can use the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications to verify their credentials.

Be wary of any preparer who bases their fee on a percentage of your refund amount. This practice creates a direct financial incentive for the preparer to inflate your refund through improper means. Professional preparers charge a flat fee based on the complexity of the return or an hourly rate.

A preparer who asks you to sign a blank or incomplete tax form gives them the opportunity to add whatever information they choose without your final review. This could include fake deductions, credits, or altered bank account information. Always insist on reviewing the complete, final return before signing.

What to Do if You Suspect Fraud

If you suspect your tax preparer has committed fraud, the first step is to gather all relevant documentation. This includes a complete copy of the suspicious tax return that was filed with the IRS. You will also need your own legitimate financial records for the year in question, such as your W-2s, 1099s, and receipts for any valid deductions or credits.

Also collect any correspondence you have had with the preparer, including emails, letters, receipts for payment, and any promotional materials. This information is important for establishing a record of your interactions and can be used as supporting evidence in a formal complaint.

The primary document for reporting misconduct is IRS Form 14157, Complaint: Tax Return Preparer. You will need the preparer’s name, address, phone number, and PTIN, if you have it, along with a detailed, factual description of the alleged fraud. If you believe the preparer filed or altered your return without your consent, you should also complete Form 14157-A, Return Preparer Fraud or Misconduct Affidavit.

How to Report a Fraudulent Tax Preparer

Once you have completed the necessary forms and gathered your evidence, you can submit your complaint package to the IRS. The package can be sent by mail or fax to the address listed in the instructions for Form 14157. Be sure to send copies of your documents, as the IRS will not return them.

After submission, the IRS will review the information. Due to federal tax privacy laws, the agency will not provide you with status updates on the investigation or inform you of its outcome. Your role is generally complete after the initial submission unless the IRS reaches out to you directly.

Taxpayer Liability and Preparer Consequences

The taxpayer is legally responsible for the accuracy of the information on their tax return, regardless of a preparer’s actions. When the IRS discovers errors, you will be expected to pay any resulting taxes and interest. Penalties may also be assessed, although they might be waived if you can demonstrate reasonable cause for the errors.

You must file an amended tax return using Form 1040-X, Amended U.S. Individual Income Tax Return, to correct the falsified information. Filing an amended return as soon as you become aware of the fraud is important, as it demonstrates your intent to comply with the law and can help mitigate penalties.

For the fraudulent preparer, the IRS can impose civil penalties, including fines and an injunction that legally bars them from preparing tax returns in the future. The IRS’s Office of Professional Responsibility can also censure, suspend, or disbar credentialed preparers like enrolled agents, CPAs, and attorneys.

In more serious cases, fraudulent preparers can face criminal prosecution by the Department of Justice, which can lead to substantial fines and imprisonment. These criminal charges often relate to aiding and assisting in the preparation of false tax returns, wire fraud, or identity theft.