Choose carefully when you pick someone to do your taxes.
The Internal Revenue Service is warning people that they — not the tax preparer — are responsible if a fraudulent return is submitted under their name, even if they were unaware of the fraud. And with that responsibility comes the cost of penalties and interest on any additional taxes that may be due.
Fraudulent returns might include such things as inflated personal or business deductions, improper deductions, unallowable credits or too many exemptions.
The agency is quick to acknowledge that most tax preparers are honest. But there are some unscrupulous providers out there.
In fiscal 2008, 214 investigations of suspected tax-preparer fraud were initiated, according to the IRS Criminal Investigation Division. There were 142 indictments or criminal informations brought, and 124 tax preparers were sentenced — an 81.5 percent incarceration rate, according to the IRS. Those who were convicted or pleaded guilty served an average 18 months in prison, home confinement, electronic monitoring or a combination.
Among the cases described by the IRS:
_In Houston, a tax preparer was sentenced to 21 months in prison and ordered to pay $175,000 in restitution after being convicted of manipulating a return to make it appear that a taxpayer was due a refund of more than $4,000. The actual refund due was $26.
_A New Jersey preparer got a six-year sentence and was fined $100,000 after being convicted of filing fraudulent federal returns. The government said its loss as a result of the fraud was more than $2.5 million.
_A North Carolina preparer was sentenced to 70 months in prison after pleading guilty to charges he conspired to defraud the government by filing false returns and evading his own personal income taxes. He was ordered to pay $6 million in restitution — about the same total as the fraudulent refunds he was charged with claiming for clients.
In addition, the IRS since 2001 has obtained permanent injunctions against more than 365 "abusive tax scheme promoters and abusive return preparers."
"We're always on the lookout for new schemes," said Debbie King, deputy director of refund crimes for the IRS Criminal Investigation Division.
King said the IRS looks for suspicious patterns in a preparer's returns. Is the same type of deduction claimed for the exact same dollar amount in multiple returns? Is there a higher percentage of people claiming a certain type of deduction than the general population at large?
When choosing a tax-preparer, someone should be "as careful as they would be choosing a doctor or lawyer," the IRS says.
That means asking questions: What are the preparer's credentials and affiliations? Will he or she be in business long enough to answer questions after the return is filed? How are fees computed? Avoid preparers who base their fee on a percentage of the refund, the IRS advises. And don't sign a blank return.
A tax preparer should insist on seeing receipts and other essential information. King says taxpayers should go over their return with the person who prepared it and ask questions. "If the answer doesn't sound right, they need to walk away," she says.
There's more to choosing a preparer than being on the lookout for possible fraud.
Jeff Schnepper, MSN tax expert, says a good tax preparer will help you look for legitimate opportunities for savings. That includes ensuring that you don't miss out on exemptions, deductions and credits to which you are entitled.
Keeping good records is essential. "The number one thing that I teach my clients is substantiation," he says, especially if you're being audited. "If you have the records you're going to win. If you don't have the records you're going to lose."
Preparers must know the federal tax code and keep up with changes in it.
H&R Block requires its tax preparers to complete 110 hours of classroom work, score 80 percent or above on an exam and pass a background check. Returning preparers must complete nearly 50 hours of continuing education courses.
The company advises taxpayers to find a preparer with the right expertise for them.
"Taxpayers wouldn't see a chiropractor for a head cold," says Nancy Mays, director of communications for the tax preparation company. "Similarly, a small business owner shouldn't use a tax professional with no knowledge of the Schedule C. If they're not experts in your area of need, work with a different tax preparer."
Asked if there had been instances of tax preparation fraud among H&R Block personnel, Mays said, "We take proactive steps to uncover questionable activity related to tax preparation and fully cooperate with the IRS in any investigation."
The IRS encourages people who suspect fraud by a tax provider to report it. It has created Form 3949-A specifically for that purpose. It is available on the IRS Web site, http://www.irs.gov, or by calling 800-829-3676. People also may write a detailed letter describing the suspected fraud and mail it to the IRS. "The identify of the person filing the report is not required but it could be helpful in an investigation and it can be kept confidential," the IRS says.
Whistleblowers might be eligible for a reward.