What to Do If You Suspect Tax Preparer Fraud
Understand your legal and financial responsibility for your tax return and learn the formal process for addressing professional preparer misconduct.
Tax preparer fraud occurs when a professional hired to prepare tax returns intentionally falsifies information. This misconduct can range from inflating deductions to stealing a taxpayer’s identity, creating significant financial and legal problems for the victim. The consequences can be severe, leaving individuals to face audits, penalties, and debt.
Common Schemes and Red Flags
Dishonest tax preparers use various schemes to defraud both taxpayers and the government. A frequent method involves inflating deductions or fabricating credits, like the Earned Income Tax Credit, to generate a larger refund than the taxpayer is legitimately owed. The preparer then often skims a portion of this inflated refund, sometimes by having it deposited into a bank account they control.
Another prevalent scheme is the outright theft of a taxpayer’s refund. In these cases, the preparer may alter the direct deposit information on the tax return, diverting the entire refund to their own account. In more severe instances, a preparer might use a client’s personal information, such as their Social Security number, to file a fraudulent return without the taxpayer’s consent, effectively stealing their identity.
Several red flags can alert you to a potentially fraudulent tax preparer. Be wary of any preparer who:
- Guarantees a specific refund amount before thoroughly reviewing your financial information.
- Bases their fee on a percentage of the refund amount, a practice the IRS prohibits.
- Refuses to sign the tax return or fails to include their required Preparer Tax Identification Number (PTIN).
- Asks you to sign a blank or incomplete tax form.
- Promises unusually large refunds that seem too good to be true.
- Fails to provide you with a complete copy of your tax return for your records before it is filed.
Taxpayer Liability for Preparer Misconduct
A core principle of the U.S. tax system is that the taxpayer bears the ultimate responsibility for the accuracy of their tax return. This holds true even when a return is completed by a paid professional. If a tax preparer commits fraud or makes errors on your return, the legal obligation to correct it and pay any resulting taxes, penalties, and interest falls on you.
The financial consequences can be substantial. You will be required to repay any portion of a refund that you were not entitled to receive. On top of the repayment, the IRS will charge interest on the underpayment, which begins accruing from the original tax deadline.
Beyond repayment and interest, the IRS can impose various penalties. A common penalty is the accuracy-related penalty, which is 20% of the underpayment of tax attributable to negligence or a substantial understatement of income tax. It is important to show the IRS that a preparer altered your return after you signed it to potentially mitigate these outcomes.
While you may have a separate legal claim against the fraudulent preparer, this does not absolve you of your immediate obligations to the IRS. The process of rectifying the situation involves filing an amended return to correct the inaccuracies. Demonstrating that you were a victim may help in seeking penalty relief, but the core tax liability and accrued interest will remain your responsibility.
Required Information and Forms for Reporting Fraud
Before you can formally report a fraudulent tax preparer, you must gather specific information and complete the appropriate IRS forms. The first step is to collect all identifying details about the preparer, including their full name, business name, address, phone number, and their Preparer Tax Identification Number (PTIN).
The primary document for lodging a complaint is IRS Form 14157, Complaint: Tax Return Preparer. On this form, you will need to provide the preparer’s information and detail the specific actions you believe were fraudulent. You will be asked to describe the misconduct, such as whether the preparer altered your return without your consent or stole your refund.
In cases where a preparer filed a return without your consent or altered it after you signed, you should also complete Form 14157-A, Tax Return Preparer Fraud or Misconduct Affidavit. This form serves as a sworn statement detailing the fraud and its impact on your tax liability. It requires a more in-depth explanation of the situation and must be signed under penalty of perjury.
Along with these forms, you should gather supporting documentation. This includes:
- A copy of the fraudulent tax return filed by the preparer.
- A copy of the tax return as you believe it should have been filed.
- Proof of your refund amount, such as bank statements showing the direct deposit.
- Copies of any contracts, receipts, or advertisements from the preparer.
How to Submit a Complaint to the IRS
Once you have completed the required forms and gathered all supporting documents, you are ready to submit your complaint package. The IRS provides specific mailing addresses for these submissions, which can be found in the instructions for the forms.
It is advisable to send the package via a mail service that provides tracking so you have a record of when the IRS received it. You should always send copies of your documents, not the originals.
After submitting the complaint, the IRS will begin its own investigation. The agency will not provide you with status updates or the results of the investigation due to federal tax privacy laws that protect all taxpayers, including the preparer. The investigation is a confidential process handled by the IRS’s Return Preparer Office.
The focus of your complaint is to alert the IRS to the preparer’s misconduct, which may lead to civil or criminal penalties against them. Your personal tax situation must be addressed separately from this process.