By Andrea Coombes
There’s never a shortage of Justice Department news detailing indictments against tax-return preparers who make false claims on tax returns. Just this month the agency pointed to a long list of preparers who fraudulently claimed the home-buyer tax credit on taxpayers’ returns.
So, what do all these scams and frauds mean for the taxpayers involved? It’ll vary depending on the specific situation, but tax penalties and interest are likely — and a major headache is a certainty. To avoid that expensive headache, as I wrote at MarketWatch.com, the key is to vet your tax preparer, and check your return before you sign it. Yes, it’s drudgery, but you’re ultimately responsible in most cases.
While in certain situations a taxpayer may be able to convince the IRS and Justice Department that he wasn’t at fault – that the preparer committed the fraud without the taxpayer’s knowledge – it’s a tough case to make. And even if you’re successful, you’ll owe the back taxes. That’s never a fun surprise.
Unfortunately, it’s not always easy to vet preparers to find a trustworthy pro. When it comes to professional standards, the world of tax preparation is a work in progress. While certified public accountants and enrolled agents are subject to relatively high standards including competency tests and continuing-education requirements — CPAs are governed by state boards of accountancy and EAs by the IRS — there are a slew of people who, every tax season, simply hang out a shingle and get to work crunching the numbers on Forms 1040. And while it’s fairly easy to find out whether a CPA or EA has been censured (more on that below), that’s not the case for paid preparers who don’t have a designation.
The good news is this situation is changing—albeit slowly. Eventually it’ll be a lot easier to vet tax preparers online because of some new requirements coming in the next few years. (For now, if you want to check on a preparer who is not a CPA or EA, the Better Business Bureau is a place to start.) The IRS is working on its new oversight program for unlicensed paid preparers, and some tax experts say in a few years it may be possible for taxpayers to simply enter the PTIN, or preparer tax identification number, now required of all preparers, into an online database to make sure that preparer is in good standing with the IRS. In a few years, under the new program, it’s expected that preparers will have to pass a competency test and take classes to keep abreast of tax law to maintain their PTIN.
Meanwhile, already some state boards of accountancy – the agencies that license CPAs – have websites where you can enter an accountant’s name to see whether there are problems with that person’s license. Search online for “state board of accountancy” and your state. And starting in April, the National Association of State Boards of Accountancy will offer a consumer website that compiles data for a good chunk of those state agencies nationwide, making that search process even easier.
If you want to check on an enrolled agent, you can email the IRS’s Office of Professional Responsibility to ask about a specific EA, at . Or, consider hiring someone who’s a member of the National Association of Enrolled Agents – that organization’s members are required to be in good standing with the IRS, and their site has an easy search tool. Similarly, hiring a CPA who’s a member of the American Institute of CPAs or another member organization helps ensure another layer of oversight.
And about that tax return: Before you sign it, check to make sure it fits your financial picture. You don’t need to be an expert in tax law to know how many dependents you can claim, or whether you’re eligible for the home-buyer tax credit. If something seems suspect, ask questions. Those words “under penalties of perjury” right next to your signature line on Form 1040? They’re no joke.
The IRS has more tips on choosing a tax preparer, which are worth checking out.
Readers, have you taken the time to adequately vet your tax preparer? Have you or anyone you know been burned by a bad preparer?