Video: Are tax preparers skirting the law?

By Lea Thompson Chief consumer correspondent
NBC News
updated 4/3/2006 7:39:35 PM ET 2006-04-03T23:39:35

Our idea was simple: Give an NBC News intern, who's a part-time waitress making $11,000 a year, a hidden video camera and take her to get her taxes done at major tax chains. We visited just one preparer from each office, our results mirrored what the government found.

First stop, the smallest: Liberty Tax Service. We were in and out for $75 — no refund. But it was far different at the nation's two biggest chains. H&R Block charged us $177; Jackson Hewitt, $205. But, unlike Liberty, we got hefty refunds.

Sounds good. But our waitress made $4,000 in cash tips that the law says she must report. The H&R Block preparers told us she didn't need to.

Woman (to man): "I mean, you know, that's a legal loophole."
Man: "There's no paper trail on it."
Woman: "Exactly."
Man (to intern): "You're not making a lot of money. It's not like the IRS is going to track you down." 

And the Jackson Hewitt preparer?

Intern: "So what about my cash that I made?  Does that not get taxed or something?"
Man: "That's not taxed. It's one of the perks for... you know."

It's not a perk. It's illegal. But by not reporting, we would have received a $585 refund.

In fact, the Jackson Hewitt preparer seemed even more flexible.

Intern: "So if I had kids or something would I get more money back?"
Man: "We can make up a kid and put it in there, just to show you, if you want to do that."

It would have boosted our refund to $3,100.

So why would any tax preparer encourage cheating to get you that big refund?

"There is a tendency for a lot of preparers to line their pockets, frankly, by charging hidden additional fees," says Sen. Max Baucus, D-Mont.

A federal study to be released Tuesday by the Government Accountability Office found exactly what we did — tax preparers at major chains in one city encouraging cheating. Half the time, they did not report side income or they claimed an ineligible child.

Both H&R Block and Jackson Hewitt say what happened to us is a clear violation of their policies and unacceptable. They say they have taken actions against the employees involved.

But if something is wrong, tax preparers face little risk. The IRS would be looking for you.

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