Recently, we talked about Roni Deutch’s film, “Death or Taxes: The Sad Truth About Our American Tax System.”
It’s time to look at one of the saddest components of the American tax system – the predators. It’s bad enough having to fight off the sometimes-terrifying collections tactics of the IRS. It’s even worse when the firm hired to protect you, gets you deeper into debt or causes you to lose your home or business.
The fees for tax debt reduction assistance range from $1,200 to $5,000 or more. Those fees aren’t unreasonable. When handled properly, it takes 30-50 hours to prepare an offer in compromise (OIC).
But the expenses are outrageous when the firms take your money and make promises they can’t keep. They shouldn’t sign you up when they know the IRS won’t approve your OIC. But too many do, and months later, they tell you the IRS rejected your request. By then, your penalties and interest may have skyrocketed, your credit been ruined and your wages been garnished.
Let’s look at recent court cases filed against television and radio advertisers, preying on your fears, your insecurities, and your tax terrors. All cases involve national tax resolution firms who have misled troubled taxpayers.
On April 22nd, the California Superior Court froze the assets of Roni Deutch for shredding documents in defiance of a court order, and not giving refunds to clients, as ordered. IRS has also hit her with a $183,000 lien. Trial is set for July.
Minnesota Attorney General Lori Swanson filed suit accusing Houston-based TaxMasters of fraud and deception. Texas filed suit alleging the company unlawfully “engaged in false, misleading, and deceptive acts and practices.” Florida is investigating them, too.
Florida is also investigating JK Harris for allegedly violating a 2008 settlement with Florida and 17 other states over misleading sales tactics.
If there’s a TV advertiser promising that you can pay pennies on the dollar, you can bet there will be consumer complaints and investigations sooner or later. The IRS even publishes an alert. Why? Not everyone qualifies for offers in a compromise. But some of these firms will sell them to anyone desperate enough to pay.
Imagine – you finally hit the send button on your electronic tax return only to find out that someone else already has filed in your name — and cashed your refund.
That happened to a friend of mine, and unfortunately occurs to thousands of taxpayers each year. Identity theft topped the list of consumer complaints made to the Federal Trade Commission in 2010 for the 11th year in a row, with more than 250,000 complaints.
And tax-related identity theft is no small chunk of change. In 2009, the Internal Revenue Service handled 23,000 cases of fraudsters using forged W-2 forms to collect tax refunds, according to the latest figures available. That year, there also were 24,000 cases of people using a stolen Social Security number to report income under another person’s name.
Sometimes the identity theft is obvious. Your e-filed tax return is rejected because someone has already filed under your name. Other times, “you get a notice from the IRS that says their records show you made more money than you reported on your tax return,” says Adam Levin, chairman of Identity Theft 911, an identity theft protection company. A less obvious sign - the refund you have been waiting for never arrives.
But don’t rush to claim identity theft because of a late refund, he warns. “You don’t want to flag yourself until you know you’ve got a problem,” says Levin. You don’t want an unnecessary tax audit. It normally takes about six weeks to get your check if you file by paper, or three weeks if you file online, says Levin. If the IRS says your check has already been cashed, and it wasn’t by you, that’s confirmation that identity theft could be involved.
Your main defense is to launch an investigation with the IRS, which will work to confirm your identity, track down the fraudster and recover your refund. Each incident has a different outcome, but most taxpayers should expect to wait at least six months for the case to be resolved, according to Identity Theft 911.
If the countdown till April has you feeling flustered, you may decide to file for a tax extension. The IRS estimates that about 10.6 million taxpayers will file for an automatic six-month extension for the 2010 season, up slightly from last year. But before you fill out that Form 4868, consider a few factors that could affect your decision.
An extension gives you more time to file, not to pay. “The majority of people think they want to file [an extension] because they owe, but that’s not a legitimate reason,” says Elaine Smith, a tax adviser at H&R Block. If that check to the IRS isn’t postmarked by April 18, 2011, you will owe interest and most likely some nasty penalties.
The IRS won’t penalize you for an extension if you’re owed a refund, as The Tax Blog recently reported. However, if you think you owe money “estimate the amount and round up” when calculating how much to pay, says Melissa Labant, a CPA on the tax staff at the American Institute of CPAs. If you’re self-employed and you make quarterly estimates, look at last year’s books to make a good-faith approximation of what you owe. If you overpay, you can always get money back as a refund, or apply the excess to future quarterly estimates. However, underpayment will result in interest on the amount due from the due date.
Filing for an extension has gotten easier given the option to e-file your Form 4868. What’s more, filers now get an automatic six-month extension on federal taxes. (Before tax year 2005 filers could apply for an initial four-month extension and had to separately file for another two months, if necessary.)
Nevertheless, experts say that while many clients inquire about extensions, fewer than 5% of total returns in 2009 used them. “Typically people want to file and be done with it, especially if you’re getting a refund,” says Labant. About 77% of filers received refunds in tax year 2009, according to the IRS.
A couple of years ago, I had to face reality and file my first post college tax return.
No longer privy to the substantial discounts major tax preparation companies offer to college students, I hunted for the cheapest way to file my taxes without jeopardizing my refund. An uncle suggested someone who would handle all of my forms for a $50 flat fee. The previous year, I had worked in four states, lived in three and graduated from college, so I knew my tax return wasn’t going to be simple. I hadn’t made too much money between my internships and part time job so I wanted to avoid the nearly $200 fee quoted to me over the phone for my complicated tax return.
The $50 price was right, but I should’ve known something was up right away. After waiting nearly two hours, the preparer ignored my questions, was insulted when I questioned her credentials and got me to sign forms without carefully reading them. My mistake, but she had come recommended.
My uncle later admitted he had some qualms. He was skeptical because she had never fully explained the deductions she was filing on his behalf, but he didn’t know how to check her credentials. He also couldn’t find someone offering such an attractive price. Unfortunately, in this case cheaper wasn’t better.
My uncle visited her office about three weeks after my appointment because she wouldn’t return calls. But her office was locked and someone at a neighboring business told my uncle our preparer had been arrested for allegedly funneling a client’s tax refund to her own account. She also ran a money wiring business on the side, and was allegedly wiring some of those funds into her personal accounts as well. When I heard the news, I immediately called the help line for the Internal Revenue Service. Fortunately, it had received my forms and sent me a copy.
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 Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at email@example.com.