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Protect Yourself From Shady Tax Shops

Every year unregulated tax preparers pop up in abandoned storefronts like weeds in a cracked sidewalk. Sprouting in low-income neighborhoods, they promise fat refund checks fast. But even without upfront charges, they can have hidden costs for the unwary.

In Congressional hearings Tuesday, consumer advocates said their investigations found significant levels of fraud and incompetence by paid tax preparers, from about 25 percent to more than 80 percent.

According to the IRS, 81.2 million of nearly 145 million individual tax returns filed for tax year 2011 were completed by a paid preparer. Should one of those preparers make a mistake, or commit outright fraud, the taxpayer is on the hook in the event of an audit. By that time the "For Rent" sign may have reappeared in the tax preparer's former storefront, with no way to find him or her.

In some cases, tax preparers incorrectly boosted the number of deductions the taxpayer would take, the investigations showed. In other instances, preparers listed taxpayers claiming the earned income tax credit as having children they didn't have, fraudulently increasing the credit. Investigators found some preparers then skimmed off the inflated credit for themselves with high, undisclosed fees, before distributing the rest to the taxpayer as a refund.

To avoid one of these scenarios, there are several steps consumers can take to protect themselves.

First, those who make less than $52,000 a year can get their taxes done for free through the IRS Volunteer Income Tax Assistance (VITA) program by going to irs.treasury.gov/freetaxprep or calling 800-906-9887. And anyone making $58,000 or less can file their own taxes for free by visiting the IRS website here.

Sarah-Louise Smith, executive director of Impact Alabama, a campus-based volunteer tax preparation service, also recommends the following:

  • Ask for the preparer's credentials and for how long he's been a tax preparer.
  • Ask to see an estimate of service fees up front.
  • Avoid preparers who charge a percentage based on how big a refund you get.
  • Steer clear of those who say they can get you a bigger refund than others. They could be setting you up for tax fraud.
  • Check that the preparer writes her Preparer Tax Identification Number on the return and signs it.
  • Make sure you have a way to contact the preparer after April 15.

Part of the reason consumers need to beware is a lack of any guidelines or regulations over tax preparers, advocates say.

"Ironically, apart from CPAs and those who are credentialed as 'enrolled agents' by the IRS, the only other preparers in 46 states who are tested for competency are VITA volunteers," said Chi Chi Wu with the National Consumer Law Center, making tax preparers less regulated in most states than hairdressers.