The tax season ended in April for most of us, but for some consumers their tax headaches are only about to begin.
That's because their tax preparer — without their knowledge — changed their return to boost the refund by thousands of dollars and pocketed the extra money. Taxpayers often find out about the fraud only months later when the IRS comes knocking to demand repayment.
Preparer return fraud has been around for years, but taxpayer advocates say the crime is growing. The national taxpayer advocate sent a memo this year to her staff across the country describing how to spot the fraud and help victims set things right with the IRS. In May, legislation was introduced in Congress to raise the penalty to at least $5,000 per return against preparers perpetrating such schemes.
"It's a thriving fraud," says Caroline Ciraolo, a Baltimore tax attorney who helps taxpayers in such cases.
Taxpayers can protect themselves by doing their own taxes — not always so easy — or making sure the person they hire is reputable.
Many times the perpetrators are small shops that appear only for tax season and taxpayers hear about them through word of mouth, says James Leith, the taxpayer advocate for Maryland.
"It's typically the person that is open from January to April that can get away with altering returns and keeping the refunds," Leith says. "We're not catching it until late summer or early fall, and then they're gone."
The scheme works like this:
The preparer fills out the return, which shows, say, a refund due of $2,000. The taxpayer reviews the return and signs it. But once the taxpayer leaves, the preparer revises the return, adding more deductions or credits so the refund is inflated to, say, $12,000.
Refunds now can be split and directly deposited in more than one account. This was designed to help taxpayers save part of their refund, but it also makes fraud easier.
All the preparer has to do is fill out a form and have the IRS send a portion of the refund into the taxpayer's account and divert the rest into the preparer's account. The taxpayer receives the expected amount and doesn't suspect anything.
It's not until the summer months that the IRS begins comparing information on the returns with W-2, 1099 forms and other documents supplied by outside sources. If there are discrepancies or big deductions and credits that were never taken before, the IRS might come back requesting more information.
"They say, 'We looked at your return a little closer and you never claimed to have a home day care before. Show us some receipts,'" Leith says.
Tax lawyers say sometimes the preparer changes the taxpayer's address on the return, meaning that victims won't get IRS notices and the fraud can go undetected for years.
That's what happened to one of Ciraola's clients. The Maryland man faced an IRS criminal investigation two years ago because the preparer he used for years had falsified information on his returns and sometimes failed to file his taxes.
Ciraolo says her client would sign the returns and write a check to the preparer to cover the taxes he thought he owed plus the fee for tax preparation. (This should have been a red flag. Checks for taxes owed should be made out to the government, not a preparer.) The preparer kept all that money and changed the man's return so that it generated a refund for the preparer, Ciraolo says.
Meanwhile, his returns caught the attention of the IRS. He was unaware of this because the preparer had changed his address on the return so that all IRS notices went to her, Ciraolo says. He only found out there was problem when IRS special agents visited him.
If you have a problem with refund fraud, contact the local taxpayer advocate. Marylanders can call 410-962-2082.
Leith says his office can stop IRS enforcement actions, such as liens or wage garnishments to collect money that was erroneously paid out.
More difficult, he says, is getting the IRS to undertake the time-consuming task of correcting the taxpayer's account. (Nina Olson, the national taxpayer advocate, recently chastised the IRS during a congressional hearing for dragging its feet on this issue.)
If not corrected, that erroneous refund remains as an outstanding liability that accrues interest and penalties, Leith says. The next time the taxpayer is due a refund, he says, the IRS will automatically apply that money to the liability.
Leith says taxpayer advocates sometimes must pull out the strongest tool in their arsenal — the taxpayer assistance order. This basically elevates the case by telling an IRS executive to correct the account, Leith says.
This year, Leith's office has issued eight orders. "That's a lot for the first half of this year," he says.
If you suspect a preparer revised your return behind your back, order a free transcript from the IRS at irs.gov or 800-908-9946. The transcript will list the items on your return, including any refund.
"Just like folks tell you to check your credit report, you can ask for a transcript," Leith says.
He says he got a call from a lawyer last week whose client received a $100 refund from the IRS but discovered from the transcript that his tax consultant claimed a $30,000 refund by inflating foreign tax credits, Leith says.
It would seem that you could avoid problems by watching the preparer electronically file your return to the IRS. But tax experts say those returns typically are not filed immediately.
Usually, returns undergo a second review for accuracy and then the electronic returns are filed in a batch to the IRS, says Robin McKinney, director of the Maryland CASH Campaign, which provides free tax preparation for lower-income filers.
You can reduce your chances of being a victim of this fraud by making sure you find a reputable preparer in the first place.
Many victims of this fraud have low incomes, and these taxpayers are eligible for free tax preparation from the IRS-run taxpayer assistance centers or IRS-trained preparers through the Volunteer Income Tax Assistance Program. Low- to moderate-income households also qualify for free online filing through the IRS' Free-File program.
Marylanders should also check on the Maryland Board of Individual Tax Preparer's website to make sure the person they hire is registered, a new state requirement this year.
Last, never sign a return with blank lines that can be filled in later by a preparer, McKinney warns.