IRS Cracks Down on Fraudulent Tax Preparers

Karen Miller of Nashville had a good hook for attracting customers. According to government filings, she claimed that if they just filed a certain tax form, they could receive “astonishing” refunds from the Internal Revenue Service. Last year, Miller prepared and filed 41 such returns for customers, who in total claimed more than $8.3 million in refunds from federal coffers. The scam, a federal court later concluded, was based on the all too prevalent (and erroneous) belief that the Treasury Department maintains secret accounts for citizens and that taxpayers can access the money by filling out a version of Form 1099. It’s called a “redemption scheme.”

The number of Justice Department actions against tax-return preparers and tax-scheme promoters has skyrocketed from a single prosecution in 2001 to more than 435 injunctions and other legal actions since, according to statistics obtained by U.S. News. Last month, a federal court permanently barred Miller from preparing federal returns. On the same day, the government filed suit against six other preparers around the country who allegedly ran redemption schemes, seeking to shutter preparers who had sought a total of more than $560 million in fraudulent refunds.

The increase in enforcement, which comes primarily in the form of swift court-ordered injunctions barring preparers from submitting additional returns, has been made possible by a variety of new tactics. One key change has been an initiative to train IRS agents to spot fraudulent preparers and gather the information needed for Justice Department lawyers to win quick court action. Dozens of agents have received such training in the past few years. In addition, sophisticated computer models have been used to spot fishy trends in filed tax forms and connect them with suspect preparers, says Seth Heald, chief of the civil trial section in the Justice Department’s Tax Division.

The dramatic increase in enforcement has coincided with growing calls from lawmakers and tax officials to regulate an industry that has quietly escaped oversight for decades. Currently, anyone can file a tax return and charge a fee for the service. Only three states—California, Oregon, and Maryland—impose any type of licensing or certification system on those who offer such services. In 2008, the Treasury Department sent undercover auditors to preparers around the country. They reported finding systemic errors in filing, often due to inadequate training of preparers. Only 60 percent, for instance, correctly compiled information on itemized deductions.

But as the tax code grows in complexity, more and more Americans—some 60 percent, by most estimates—are turning to preparers to guide them through the maze of paperwork. Some dishonest preparers will “trade” children, complete with Social Security numbers, between filers to maximize deductions; others will try to declare pets as children to take advantage of tax credits, investigators say. Some preparers will advertise their serv­ices only to steal their customers’ personal information, like Social Security and credit information.

Last month, the IRS announced it would regulate all federal tax preparers and create a licensing and registration ­system, which would include a testing and continuing education requirement for the estimated 1 million preparers nationwide. The regulations, which will take effect in 2011, have the strong support of the big players in the tax filing industry, like H&R Block and Jackson Hewitt. The National Society of Accountants also came out in favor of the new rules, saying that they would clean up the marketplace. Lawyers, licensed enrolled agents who can represent taxpayers before the IRS, and certified public accountants are exempt from both the new competency tests and the continuing education requirements.

Tax prep experts warn customers against preparers who claim they can secure taxpayers a larger refund than others can, those who base their fee on a percentage of the refund, and those who pressure clients to take out so-called refund anticipation loans. Most important, they say, never trust a tax preparer who refuses to sign a return he or she prepares.

Preparers range from legitimate to decidedly suspect. In 2007, a federal court enjoined a Florida woman who operated her tax preparation business at a booth in a Miami flea market and, according to court documents, claimed fraudulent fuel tax credits on her customers’ returns. According to the complaint, one of the woman’s customers, a baby sitter, claimed using 16,451 gallons of gasoline for business-related purposes on her tax returns—the amount of gas needed to drive a car around the globe 10 times.

That same year, a federal court in St. Louis stopped a bus driver from filing returns as a side job. According to court filings, the driver’s business targeted immigrant filers who spoke little or no English. That’s a frequent aspect of corrupt filing cases, and preparers often charge exorbitant fees for their ultimately fraudulent services, says Heald.

Tax protesting is a common excuse that government agents hear from fraudsters. According to court documents, when IRS authorities notified an Idaho woman, one of the seven charged last month with perpetrating redemption schemes, that her claims of a secret government fund were false, the woman argued that “no ‘Act of Congress’ makes anyone ‘liable’ for income taxes,” an argument long ago rejected by the courts. Investigators say they don’t keep statistics on what percentage of fraudulent tax preparers espouse tax protester theories.

While it is the preparers who initiate fraudulent schemes, clients often suffer the most. Sometimes the preparer keeps the refund without the client knowing; other times, when the preparer and client are in cahoots, the client reaps the reward; and sometimes the IRS catches the fraud before a refund is issued. Whatever the case, the law says that taxpayers themselves are ultimately responsible for the accuracy of their returns, even if a preparer fills in the forms. Taxpayers can even end up in prison side by side with their preparer. In 2008, actor Wesley Snipes was sentenced to three years in prison and his two preparers to a combined 14 years in connection with a fraudu­lent tax scheme. (Snipes remains free on bail while appealing his conviction.)

While dodging taxes is not new, the fraud schemes have rampantly propagated over the Internet. In one such fraud case, a tax preparer from a small town in Colorado ran a business that attracted customers from across California, Colorado, Arizona, and New Mexico. The preparer allegedly sought more than $55 million in fraudulent refunds for more than 140 of those customers, according to court documents. Last October, the government asked a federal judge to bar the company from continuing to file returns. The fraud, law enforcement officials say, caused the IRS to issue $1.9 million in erroneous refunds before the government stopped sending checks. In September, Maryland tax preparer Lawrence Sperling, who had pleaded guilty, was sentenced to 33 months in prison for a similar scheme of filing fraudulent returns that cost the government more than $800,000. While the IRS says it catches most fake refund filings, it hasn’t stopped all cheats, who as of 2009 had asked for more than $3.3 trillion in refunds in the past few years.

The tax man often gets the last laugh. In addition to jail time, civil penalties for filing false returns run at 20 percent of the fraudulent claim. For the $1.9 million in bogus claims from the Colorado company, for example, the civil penalty is $380,000. And, of course, taxpayers must also return any money the IRS sent out for a fraudulent return, plus interest.

http://www.usnews.com/articles/news/2010/02/09/irs-cracks-down-on-fraudulent-tax-preparers.html