Tips of Avoiding a Devious Tax Preparer
There are many taxpayers who have found themselves on the wrong side of the IRS because they used the services of unscrupulous tax preparers. There are also others who have had their refunds embezzled by preparers. It is therefore, important that you research a tax preparer before signing up for his or her services. Below are some tips that will help you spot a crooked preparer:
- Rate Depends on Amount of Refund – Avoid preparers who base their consultation fees based on the amount of a tax refund that they are able to get you. This is because such preparers use dubious ways of increasing your refund, such as inflate figures or including non-existing dependents. Such deceptive ways of increasing your tax refund can easily lead to both civil and criminal charges and therefore, it is important that you avoid such people.
- Preparers Who Promise Large Refund – Another red flag for dubious preparers is ones who promise to get you a very large refund check as a way of enticing you to hire his or her services. Once again, such preparers may use illegal ways of raising your refund amount and this may easily get you into trouble with the tax authorities.
- PTIN Qualifications – When searching for a preparer to hire his or her services, it is important that you ensure that the preparer has a Preparer Tax Identity Number (PTIN). As from a policy started in 2012, the IRS is requiring all preparers to apply for the PTIN after meeting certain meticulous qualifications. Once the IRS authenticates the credibility of the preparer, they issue the preparer with the PTIN. Therefore, confirming that your preparer has a PTIN is an important precaution to avoiding shady tax preparers. Besides having the PTIN, the preparer also ought to sign the tax return form before submitting.
- Deposit Refunds to Preparer Account – Tax preparers who request you to indicate their address for the tax refunds or deposit tax refunds into their bank account are another red flag sign. A tax preparer should always indicate the taxpayers account for the tax refund.
- Signing Blank Form – Tax preparers that prepare tax returns and submit without you going through the returns is yet another red flag. Some tax preparers will request you to sign a blank tax return form. They will then tell you that they will prepare and submit the return on your behalf and you do not need to confirm the details. Such an arrangement can lead to the preparer giving false information for selfish gain. Even when a taxpayer uses the services of a preparer, he or she is still held responsible for all the information provided on the return. Therefore, ensure that you verify the information indicated on the return before signing the tax return form.
Tax Refund Identity Theft
Tax refund identity theft happens when bad actors get their hands on your personal information, such as your name, date of birth and/or Social Security number and use that information to file a fraudulent tax return and obtain a refund, redirecting it to their account. It does not matter if your legitimate tax return indicates that you owe taxes or that the government owes you a refund.
Common Warning Signs
- Rejected return: If an identity thief files a fake tax return for a refund, any additional returns filed using the same Social Security number will be rejected. You may be the victim if the IRS or tax preparer notifies you that your return has been rejected due to a previously filed return under the same Social Security number.
- Fake wages/employer: Identity thieves will file false tax returns using employer data that does not match your true employer.
- Collection attempts: The IRS or a tax professional may notify you in writing about additional taxes owed, collection action taken against you or a refund reduction due to unpaid debts known officially as a refund offset. While honest mistakes happen among legitimate taxpayers, it could also indicate a fraudster using your Social Security number.
- Unpaid taxes in your minor child’s name: If you receive an IRS notification about unpaid taxes in your child’s name, it may indicate his or her identity has been stolen. Identity thieves can use a child’s Social Security number to file fraudulent tax returns and secure fraudulent credit and debt that can often go undetected for years.
Summing it Up: Smart Steps to Tax Safety
Is it easy to avoid being the victim of a tax scam? It is if you know the tell-tale signs of a scam. Following these general guidelines will take you out of the pool of easy targets and set you on a path that is much more secure:
- File early.
- Be diligent about account passwords.
- Don’t listen to calls from the IRS or respond to IRS emails.
- Think before you act—honest institutions will never force you to make a decision or act on the spot. Commit to never responding immediately out of pressure.
- Don’t EVER use public Wi-Fi for tax filing or banking.
- Don’t click on links or download attachments in emails that claim to be from the IRS.
- Always check with the IRS about a bill you’ve received—even if it comes in the mail, but especially if the amount doesn’t seem right to you.
- For all things taxes, make www.irs.gov your home base
Red Flags that Might Trigger a Tax Audit
Generally speaking, the IRS audits slightly more than 1% of all individual tax returns each year. The IRS simply does not have the personnel necessary to examine too many more than they currently do, so they purpose to audit specifically-selected returns by finding and identifying the tax returns that will most likely result in uncovering unreported income, overstated deductions, false claims, or tax payers that haven’t filed tax returns in a while. So while the odds are in your favor that you will fall into the 99% of non-audited tax returns, there are some IRS Red Flags that, IF YOU CAN AVOID, will help keep you from the audit pool group.
Your chances for being contacted or audited by the IRS are dependent upon many factors, including your annual income, if you omit income yet the IRS has filings and notifications to the contrary, the types, sizes and ratios of deductions or losses you claim, whether you work for a company and in what field you work, if you own a business and the type of business you own, and if you own foreign assets or bank “offshore.” Sloppiness in tax return preparation, errors in math, discrepancies between state and federal tax returns, or wide fluctuations in reported earnings from one year to the next year may also trigger an IRS inquiry, but may not expand into a broad audit. Although there is no guaranteed way to avoid an IRS audit, you should be aware of common IRS red flags that will certainly increase your chances of drawing unwanted attention or an audit from the IRS.
Common IRS Red Flags that could trigger a Tax Audit:
You make too much money
There’s not much you can do about this KEY RED FLAG, but the cruel reality is that government tax agencies are tasks with collecting as much money as they can, so they naturally go “where the money is!” Although the overall individual audit rate is about 1.11%, the odds increase dramatically for high-income filers. IRS statistics prove that in 2011 taxpayers with incomes of $200,000 or more had an audit rate of 3.93%. A 400% greater likelihood! That $200,000+ group is subject to audit —1 of 25 returns in that group. Taxpayers who reported $1 million or more suffered a 1 in 8 chances for being audited. The audit rate drops dramatically for taxpayers reporting less than $200,000 where only 1.02% of tax returns were audited during 2011.
You make too little money
Your income is suspiciously low for your job description or profession and the computer tables will point you out as making much less than others in the same profession.
Significant changes in income
Unexplained fluctuations in income can indicate that something may have been under reported in one of the low income reporting years. Most taxpayers do not have income that swings dramatically up-and-down, and the IRS will want to know what’s going on.
Failing to report all taxable income
Remember, the IRS gets copies of all 1098’s, 1099’s, and W-2’s. If you miss some and your income reporting does not match the records the IRS has, you are more likely subject to audit.
You own a business
Business owners are simply “low hanging fruit” for revenue agents who know that they can almost always find overlooked or underpaid tax liabilities. You are a targeted group.
You own a mostly-cash business or work in a “cash business”
If it can get worse than a sole proprietor this is it! You have a billboard-sized target painted on your back if you operate a business know for mostly-cash transactions. Examples: taxis, limo services, car washes, bars, restaurants, dry cleaners, laundromats, vending routes, waiters and waitresses, etc. Advice? Play by the rules. Keep good records. IRS Revenue agents know how to conduct forensic accounting which is very effective at identifying under reporting taxpayers.
Family members on business payroll
One common method to dodge taxes is to “hire” a family member (perhaps a college-aged student) in order to take more money out of a business at a lesser-taxable rate. There is nothing illegal in hiring a family member so long as they are actually doing the work and you can prove it when asked by an IRS revenue investigator.
Unlikely business deductions
It may be tempting when doing your taxes in April to book your 18-year old’s computer purchased on December 22nd as a business deduction. What about the iPad you purchased the day prior to your wife’s birthday? How about that ski trip to Colorado for your wedding anniversary – are you really going to expense the gas, hotel, and meals as a business trip? Auditors will have the birth dates of your family members, possibly your wedding date, and are trained to look for significant purchases and expenses in the days immediately prior to birth dates, anniversaries, Christmas, etc. to verify large-dollar purchases, travel, and that entertainment expenses are really business-related. IRS revenue officers would make great party guests —oh the stories they could tell. Be conservative and responsible in booking business expenses and deductions.