Each year, millions of people enlist the aid of a tax return preparer to prepare and file their income tax returns. But remember, even if you pay someone to prepare your taxes, the law ultimately holds YOU responsible for the accuracy of the items reported on your return. So, it is important to be vigilant and careful when choosing a return preparer.
Be mindful of the following red flags when searching for and dealing with paid preparers.
1) Cash Advance Offers & Early Season Openings
Tax preparation businesses use a variety of marketing promotions to attract customers to their stores. Common promotions include cash advance loans (usually up to $6,000) and instant cash just for stopping by the store. Be very skeptical of the businesses that offer these promotions before the tax filing season begin (that is, before the IRS begins accepting returns). These "early-season" businesses usually start the promotions in December in hopes of attracting customers who need money for the holidays. But the businesses know full well that (1) the IRS does not start accepting tax returns until late-January and (2) individuals will not have their required income documents (i.e., Forms W-2 or Forms 1099) until at least mid-to-late January. To get around the income documentation requirements, many of these early-season tax preparation businesses will prepare returns using end-of-the-year paystubs—a practice generally prohibited by federal law.
2) The Bait & Switch - Promises of High Refund Amounts
Upon visiting a tax preparation store, and before asking you any questions, a preparer may guarantee that you'll receive a very large tax refund, which of course makes you happy. Unfortunately, though, to obtain the "very large tax refund," a dishonest preparer will generally report false or bogus items on your tax return. For example, these preparers may falsely claim that: (a) you attended college and paid tuition (when in fact you did not); (b) you donated tens of thousands of dollars to charities (even though your income would not allow for such large donations); or (c) you received income from operating a side business (when no such business existed). Also, these preparers often charge customers an exorbitant preparation fee of anywhere from $300 to $1,000 without disclosing these fees to the customers.
3) No Review of Return or Disclosure of Preparation Fee
Once a return is complete and ready to be filed, the preparer instructs you to sign at several different places without thoroughly reviewing the return with you. Oh, and the preparer usually does not provide you with a copy of your filed return even though it's required under federal law. Later, if the IRS conducts an audit of your return, the law holds YOU—not the preparer—responsible for paying back any tax, interest, or penalties owed in connection with the false or inaccurate items reported on your return. The interest and penalty amounts alone often result in significant financial hardships for many individuals, especially those with low-to-moderate income. Victims of preparer fraud may also miss out on several years of future tax refunds while the IRS attempts to recoup the additional tax, interest, and penalty amounts connected with the fraud.
One way to mitigate against the instances of preparer fraud is for individuals to prepare and file their own returns using trusted commercial tax preparation software. No specialized tax knowledge or tax experience is needed for most individuals to prepare and file their own taxes. And the Free File program is an easy, safe, convenient, and free option to do so.
Consider using the IRS Free File program
The IRS established the Free File program in 2003 as a way of providing free online tax preparation and electronic filing services to 70% of the taxpaying population. Individuals who meet certain income requirements qualify to use the commercial tax preparation software under the Free File program. For the 2021 tax season, those who made $72,000 or less in 2020 qualify for the program.
Even though more than 100 million individuals are eligible to use the Free File program, less than 3% participate in the program each year. Surprisingly, more than 50 million eligible individuals choose to pay someone else to prepare their taxes. Choosing a paid preparer over the Free File program means that eligible individuals (including those with very little income) are spending hundreds of millions of dollars collectively each year on a service that is otherwise easy, fast, secure, and free.
Why the low IRS Free File participation rate? Well, recent data indicates that taxpayers are largely unaware of the program’s existence and/or unsure how to successfully navigate to a participating member’s Free File offering. MyTaxRights.org seeks to directly address these problems by: (1) boosting awareness of the Free File program and other beneficial tax services (e.g., MilTax for servicemembers); and (2) promoting the use of online self-preparation services as safe and convenient options for individuals to prepare their own taxes.
So consider keeping the tax preparation fee next year and file your taxes from the comforts of home through the Free File program!
About the Author
Attorney Jordan D. Howlette is the President of MyTaxRights, LLC and the managing-member of JD Howlette Law, LLC, a civil litigation firm that represents individuals and businesses involved in tax disputes with the IRS, the United States Department of Justice (DOJ), and various state departments of revenue. A former trial attorney with the DOJ’s Tax Division, Jordan leverages his extensive background in tax litigation to educate others about their federal tax rights and responsibilities. Each tax season, Jordan also volunteers as a tax coach with the Center for the Advancement of Tax Equity, where he teaches others how to self-prepare and file their taxes through the non-profit's free tax clinics.