The feds are cracking down on fraudulent tax preparers

Karen Miller of Nashville had agood hook for attracting customers.

According to government filings, sheclaimed that if they just filed a certain tax form, they could receive"astonishing" refunds from the Internal Revenue Service. Lastyear, Miller prepared and filed 41 such returns for customers, who intotal claimed more than $8.3 million in refunds fromfederal coffers. The scam, a federal court later concluded, was based onthe all too prevalent (and erroneous) belief that the TreasuryDepartment maintains secret accounts for citizens and thattaxpayers can access the money by filling out a version of Form 1099.

It's called a "redemption scheme."

The number of Justice Department actions againsttax-return preparers and tax-scheme promoters has skyrocketed from asingle prosecution in 2001 to more than 435 injunctions and other legalactions since, according to statistics obtained by U.S. News.

Last month, a federal court permanently barred Miller from preparingfederal returns. On the same day, the government filed suit against sixother preparers around the country who allegedly ran redemption schemes,seeking to shutter preparers who had sought a total of more than$560 million in fraudulent refunds.

The increase in enforcement, which comes primarily in the form ofswift court-ordered injunctions barring preparers from submittingadditional returns, has been made possible by a variety of new tactics.

One key change has been an initiative to train IRS agents tospot fraudulent preparers and gather the information needed forJustice Department lawyers to win quick court action. Dozensof agents have received such training in the past few years. Inaddition, sophisticated computer models have been used to spot fishytrends in filed tax forms and connect them with suspect preparers, saysSeth Heald, chief of the civil trial section in theJustice Department's Tax Division.

The dramatic increase in enforcement has coincided with growing callsfrom lawmakers and tax officials to regulate an industry that hasquietly escaped oversight for decades.

Currently, anyone can file a taxreturn and charge a fee for the service. Only three states --California, Oregon, andMaryland -- impose any type of licensing orcertification system on those who offer such services. In 2008, theTreasury Department sent undercover auditors to preparersaround the country. They reported finding systemic errors in filing,often due to inadequate training of preparers. Only 60 percent, forinstance, correctly compiled information on itemized deductions.

But as the tax code grows in complexity, more and more Americans --some 60 percent, by most estimates -- are turning to preparers to guidethem through the maze of paperwork.

Some dishonest preparers will"trade" children, complete with Social Security numbers,between filers to maximize deductions; others will try to declare petsas children to take advantage of tax credits, investigators say. Somepreparers will advertise their services only to steal their customers'personal information, like Social Security and creditinformation.

Last month, the IRS announced it would regulate allfederal tax preparers and create a licensing and registration system,which would include a testing and continuing education requirement forthe estimated 1 million preparers nationwide.

The regulations, whichwill take effect in 2011, have the strong support of the big players inthe tax filing industry, like H&R Block and Jackson Hewitt. The National Society ofAccountants also came out in favor of the new rules, saying thatthey would clean up the marketplace. Lawyers, licensed enrolled agentswho can represent taxpayers before the IRS, and certifiedpublic accountants are exempt from both the new competency tests and thecontinuing education requirements.

Tax prep experts warn customers against preparers who claim they cansecure taxpayers a larger refund than others can, those who base theirfee on a percentage of the refund, and those who pressure clients totake out so-called refund anticipation loans. Most important, they say,never trust a tax preparer who refuses to sign a return he or sheprepares.

Preparers range from legitimate to decidedly suspect.

In 2007, afederal court enjoined a Florida woman who operatedher tax preparation business at a booth in a Miamiflea market and, according to court documents, claimed fraudulent fueltax credits on her customers' returns. According to the complaint, oneof the woman's customers, a baby sitter, claimed using 16,451 gallons ofgasoline for business-related purposes on her tax returns -- the amountof gas needed to drive a car around the globe 10 times.

That same year, a federal court in St. Louisstopped a bus driver from filing returns as a side job. According tocourt filings, the driver's business targeted immigrant filers who spokelittle or no English. That's a frequent aspect of corrupt filing cases,and preparers often charge exorbitant fees for their ultimatelyfraudulent services, says Heald.

Tax protesting is a common excuse that government agents hear fromfraudsters.

According to court documents, when IRSauthorities notified an Idaho woman, one of theseven charged last month with perpetrating redemption schemes, that herclaims of a secret government fund were false, the woman argued that "no'Act of Congress' makes anyone 'liable' for income taxes," anargument long ago rejected by the courts. Investigators say they don'tkeep statistics on what percentage of fraudulent tax preparers espousetax protester theories.

While it is the preparers who initiate fraudulent schemes, clientsoften suffer the most. Sometimes the preparer keeps the refund withoutthe client knowing; other times, when the preparer and client are incahoots, the client reaps the reward; and sometimes the IRScatches the fraud before a refund is issued. Whatever the case, the lawsays that taxpayers themselves are ultimately responsible for theaccuracy of their returns, even if a preparer fills in the forms.Taxpayers can even end up in prison side by side with their preparer. In2008, actor Wesley Snipes was sentenced to three yearsin prison and his two preparers to a combined 14 years in connectionwith a fraudulent tax scheme. (Snipes remains free on bail whileappealing his conviction.)

While dodging taxes is not new, the fraud schemes have rampantlypropagated over the Internet. In one such fraud case, a tax preparerfrom a small town in Colorado ran a business thatattracted customers from across California,Colorado, Arizona, andNew Mexico. The preparer allegedly sought more than$55 million in fraudulent refunds for more than 140 ofthose customers, according to court documents. Last October, thegovernment asked a federal judge to bar the company from continuing tofile returns. The fraud, law enforcement officials say, caused theIRS to issue $1.9 million in erroneous refundsbefore the government stopped sending checks. In September,Maryland tax preparer LawrenceSperling, who had pleaded guilty, was sentenced to 33 months inprison for a similar scheme of filing fraudulent returns that cost thegovernment more than $800,000. While the IRSsays it catches most fake refund filings, it hasn't stopped all cheats,who as of 2009 had asked for more than $3.3 trillion inrefunds in the past few years.

The tax man often gets the last laugh. In addition to jail time,civil penalties for filing false returns run at 20 percent of thefraudulent claim. For the $1.9 million in bogus claimsfrom the Colorado company, for example, the civilpenalty is $380,000. And, of course, taxpayers must alsoreturn any money the IRS sent out for a fraudulent return,plus interest.


Personal Finance - IRS Cracks Down on Fraudulent Tax Preparers

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