Is Your Tax Preparer Cutting Corners?

Who’s Doing Your Taxes – and Can You Trust Them?

Tax season can be a stressful time for many, filled with uncertainty and a sense of dread. It's tempting to simply hand over your financial documents to a tax preparer and hope for the best, but being proactive in choosing someone you can trust is crucial. After all, you're entrusting them with your sensitive personal information and the responsibility of accurately filing your taxes. Failing to file an accurate return can lead to penalties, interest on unpaid taxes, and even criminal charges in cases of intentional fraud ¹. Choosing a trustworthy trustworthy tax preparer can provide peace of mind and help you avoid these potential pitfalls. But how can you be sure they're handling your taxes correctly? Is Your Tax Preparer Cutting Corners?

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The IRS Criminal Investigation (IRS-CI) division recently released its Fiscal Year 2024 Annual Report, highlighting the agency's efforts in combating financial crimes, including tax fraud ². The report revealed that IRS-CI identified over $9.1 billion in fraud related to tax and financial crimes, obtained court orders totaling $1.7 billion in restitution to the IRS, and seized criminal assets totaling approximately $1.2 billion ². These figures underscore the importance of carefully selecting a tax professional and being vigilant against potential fraud.

In this blog post, we'll explore the different types of tax professionals, their qualifications, and how to choose someone who is both competent and ethical. We'll also discuss warning signs of a dishonest tax professional and what to do if you suspect your tax professional is not acting in your best interest.

Types of Tax Professionals

When it comes to tax preparation, you have several options. Here are some of the most common types of tax professionals:

• Certified Public Accountants (CPAs): CPAs are licensed professionals who have met rigorous education and experience requirements, including passing the Uniform CPA Examination. They are qualified to provide a wide range of accounting and tax services, including tax preparation, auditing, and financial planning ³. CPAs have unlimited representation rights before the IRS, meaning they can represent clients on any tax matter ⁴. Individuals and businesses with complex tax returns often turn to the expertise of a CPA who specializes in their tax situation ⁵.
• Enrolled Agents (EAs): EAs are federally-authorized tax practitioners who have demonstrated technical expertise in taxation. Unlike CPAs, who can offer services in various financial areas, EAs specialize exclusively in tax preparation and have passed a three-part Special Enrollment Examination (SEE) administered by the IRS ⁵. They have unlimited representation rights before the IRS ⁴. EAs are a good option for those with complex tax situations who want a professional dedicated solely to tax preparation ⁵.
• Tax Attorneys: Tax attorneys are lawyers who specialize in tax law. They can provide tax advice, prepare tax returns, and represent clients in tax court ³. Like CPAs, tax attorneys have unlimited representation rights before the IRS ⁴. If you have legal issues related to taxes or anticipate needing representation in tax court, a tax attorney is the best choice ⁶.
• Tax Preparers: This is a broad term that encompasses anyone who is paid to prepare tax returns. Some tax preparers may have professional credentials like the Accredited Tax Preparer (ATP) certification, while others may not ⁵. It's important to note that non-credentialed tax preparers may have limited representation rights before the IRS ⁷.
• Tax Advisors: Tax advisors, also known as tax consultants, are financial experts with advanced knowledge of tax accounting and law. They focus on counseling clients on a range of tax optimization strategies. Tax advisors can be CPAs, Enrolled Agents, or Tax attorneys and work for a company or be self-employed ⁴.

Choosing a Tax Professional

With so many options available, how do you choose the right tax professional for your needs? Here are some key factors to consider:

• Qualifications: Verify the tax preparer's credentials and experience. Ask about their education, certifications, and experience in handling tax situations similar to yours. For example, if you have income from foreign investments, ensure the preparer has experience with overseas investors ⁸.
• Reputation: Check with the Better Business Bureau (BBB) and online review sites to see if there are any complaints filed against the preparer or firm ⁶. You can also ask for referrals from friends, family, or colleagues. Check for any disciplinary actions and licensure status through the state boards of accountancy for certified public accountants; the state bar associations for attorneys; and the IRS Office of Enrollment for enrolled agents ⁹.
• Fees: Inquire about the preparer's fees upfront. Avoid preparers who base their fees on a percentage of your refund, as this can create an incentive for them to inflate your refund amount ⁶. Ask about extra fees for e-filing state, federal, and local returns and fees for any unexpected complications ⁶.
• Communication: Choose a tax preparer who communicates clearly and is accessible throughout the year, not just during tax season. You want someone who will answer your questions and address any concerns you may have ⁹. Ask if they offer support after the return has been filed, in case questions arise ⁹.
• Security: Ask about the preparer's data security measures. How do they protect your sensitive personal and financial information? Do they use secure software and encryption to safeguard your data ¹⁰?
• Representation Rights: If you have a complex tax situation or anticipate potential issues with the IRS, it's crucial to choose a tax professional with unlimited representation rights, such as a CPA, EA, or tax attorney ¹¹. Will they be able to help you with an audit¹²?
• Electronic Filing: Ask if they offer electronic filing. Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return ⁹.
• Complete and Accurate Information: Provide all records and receipts needed to prepare your return. Reputable preparers will request to see your records...source stub ⁹.
• Thorough Review: Never sign a blank return. Before you sign your tax return, review it and ask questions. Make sure you understand everything and are...source by law ⁹.
• IRS Directory: Confirm that your tax preparer has an IRS-issued PTIN for that tax year. The IRS maintains a searchable directory of preparers who hold professional credentials or qualifications ¹³.

The Importance of Keeping Good Records

Accurate record-keeping is essential for tax purposes. It not only helps ensure that your tax return is accurate but also makes it easier to respond to any inquiries from the IRS. The IRS recommends keeping tax documents for at least three years after filing your return and/or paying taxes ¹⁴. Here are some tips for keeping good records:

• Use a Record-Keeping System: Choose a system that works for you, whether it's electronic or paper-based. The IRS doesn't require any specific system, but it should clearly show your income and expenses ¹⁵.
• Keep Supporting Documents: Retain all supporting documents, such as receipts, invoices, and canceled checks, that substantiate the entries in your books and on your tax return ¹⁵.
• Organize Your Records: Organize your records by year and type of income or expense to make them easy to find when needed ¹⁵.
• Store Records Securely: Keep your records in a safe place to protect them from theft, fire, or other damage ¹⁶.
• Use Technology: Consider using accounting software or apps to help you track expenses, mileage, and charitable contributions ¹⁷.
• Keep Records on Assets: Keep records on assets such as stocks, bonds, and your home until the statute of limitations expires for the tax year in which you sell them ¹⁴.
• Dispose of Records Securely: Dispose of old tax documents securely by shredding them or using a shredding service ¹⁴.

Understanding Your Tax Return

It's important to take the time to understand your tax return, even if you have a professional prepare it for you. Here's why:

• Accuracy: Reviewing your return helps ensure that all the information is correct and that you're claiming all the deductions and credits you're entitled to.
• Awareness: Understanding your tax return gives you a better grasp of your overall financial situation and how taxes impact your finances.
• Responsibility: Ultimately, you are responsible for the accuracy of your tax return, even if someone else prepares it ¹⁸.

Don't hesitate to ask your tax preparer questions about anything you don't understand. They should be able to explain your return in plain language and address any concerns you may have ¹⁹.

Here are some key things to understand about your tax return:

• Types of Taxes: Taxes can be broadly categorized as direct or indirect. Direct taxes, like income tax, are paid directly to the government by the individual or entity being taxed. Indirect taxes, like sales tax, are included in the price of goods and services and are collected by the seller, who then remits them to the government ²⁰.
• Pre-tax and Post-tax Income: Pre-tax income is your earnings before any taxes are deducted. Post-tax income is what you receive after taxes are withheld. Understanding this difference is crucial for budgeting and financial planning ²⁰.
• Tax Deductions and Credits: Tax deductions reduce your taxable income, while tax credits directly reduce the amount of tax you owe. Understanding these can help you minimize your tax liability ²⁰.
• Tax Return Sections: A Form 1040 consists of several sections that ask different questions to determine how much you may owe the government or how much you may get back ²¹.
  • Filing Status: The IRS offers five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) with Dependent Child. Your filing status affects your tax liability and eligibility for certain deductions and credits ²¹.
  • Dependents: Claiming dependents can significantly impact your tax liability. You must meet specific requirements to claim someone as a dependent ²¹.
  • Income: This section reports all your taxable income from various sources, such as wages, investments, and self-employment ²¹.
  • Deductions: You can choose to take the standard deduction or itemize your deductions. The standard deduction is a fixed amount, while itemized deductions are specific expenses you can deduct ²¹.
  • Tax Credits: This section lists any tax credits you're eligible for, which can reduce your tax liability dollar for dollar ²¹.
  • Payments and Refund/Tax Owed: This section calculates your final tax liability by considering your income, deductions, credits, and any taxes you've already paid throughout the year. It determines whether you'll receive a refund or owe taxes ²¹.

Warning Signs of a Dishonest Tax Professional

While most tax preparers are honest and ethical, there are some bad actors out there. Here are some red flags to watch out for:

• Refusing to Sign the Return: The IRS requires paid preparers to sign tax returns and include their PTIN. "Ghost" preparers who refuse to do so may be engaging in fraudulent activities ²². This is often because they are trying to avoid being held accountable for errors or fraudulent information on the return ¹³.
• Promising a Larger Refund Than Others: Be wary of preparers who guarantee a larger refund than their competitors. They may be inflating your refund by claiming false deductions or credits ¹³. This can lead to penalties and interest for you if the IRS discovers the discrepancies ²³.
• Basing Fees on a Percentage of the Refund: This practice can incentivize preparers to maximize your refund, even if it means using questionable methods ²³. This can lead to inflated refunds and potential legal trouble for you down the line ²³.
• Asking for Cash Payments Only: This can be a sign that the preparer is trying to avoid a paper trail ¹³. This makes it difficult to track payments and can be a sign of tax evasion.
• Asking You to Sign a Blank Return: Never sign a blank or incomplete tax form. You are ultimately responsible for the accuracy of your return, and signing a blank form gives the preparer the opportunity to alter it without your knowledge ²⁴. This can lead to fraudulent claims being made on your behalf, putting you at risk of penalties and legal consequences.
• Directing Your Refund to Their Account: Your refund should always be deposited into your bank account, not the preparer's ¹³. This is a clear sign of fraud and could result in your refund being stolen.
• Not Asking for Documentation: A reputable tax preparer will ask for documentation to support your income and deductions. Be wary of preparers who don't require full documentation of all your income sources or deductions ¹³.
• Implying Endorsement by the IRS: There are no IRS-endorsed tax professionals. If a preparer implies endorsement by the IRS, it's a red flag ¹².
• Suspicious Emails: Never open attachments or click on links in emails from tax preparers you don't know. This could be a phishing scam to steal your personal information ¹³.

What to Do if You Suspect Your Tax Professional Is Dishonest

If you suspect your tax professional is dishonest or has made errors on your return, here are some steps you can take:

• Contact the IRS: You can report abusive tax preparers and suspected tax fraud to the IRS using Form 14157, Complaint: Tax Return Preparer ²². If you suspect a tax preparer filed or changed your return without your consent, you should file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit ²⁵.
• File a Complaint with the Better Business Bureau: If the preparer is a BBB Accredited Business, you can file a complaint with the BBB ⁶.
• Contact Your State's Tax Agency: Many states have their own regulations for tax preparers. You can file a complaint with your state's tax agency if you suspect any violations ²⁵. For example, in California, you can verify a tax preparer's license with the California Tax Education Council, California Board of Accountancy, and State Bar of California ²⁵.
• Consult with Another Tax Professional: If you believe there are errors on your return, seek a second opinion from a qualified tax professional ¹⁸.
• Keep Records: Maintain copies of all your tax documents, communications with the preparer, and any other relevant information ¹⁸.

Conclusion

Choosing the right tax professional is a crucial step in ensuring that your taxes are filed accurately and ethically. By understanding the different types of tax professionals, their qualifications, and the warning signs of potential fraud, you can make an informed decision and protect yourself from unnecessary stress and financial harm. Remember to keep good records, understand your tax return, and don't hesitate to ask questions.

As Christians, we are called to be good stewards of our resources, and that includes being responsible in our tax obligations. Proverbs 27:23-24 reminds us to "Be sure you know the condition of your flocks, give careful attention to your herds; for riches do not endure forever, and a crown is not secure for all generations." This wisdom applies to our finances as well. By taking a proactive approach to tax preparation, we can fulfill our civic duty with integrity and peace of mind, ensuring that we are managing our finances in a way that honors God.

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