Tax pros under the microscope
By Kay Bell • Bankrate.com

Uncle Sam is tired of tax cheaters and he's vowed to go after them all, including professionals.

In addition to the renewed random audits of individual taxpayers, the Internal Revenue Service is increasing its focus on paid tax preparers it suspects are misleading clients.

Last year, the IRS more than doubled criminal investigations into the actions of paid preparers. While numerically small (254 cases were initiated in fiscal 2002), the agency says this is just the beginning of its efforts to stop professional scofflaws.

"We are seeing more and more activity involving unscrupulous tax preparers," says David Palmer, chief of the IRS Criminal Investigation division. Fraudulent tax preparation includes inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions.

Abusive preparers may also manipulate a client's income figures to obtain tax credits for which the filer is not eligible, according to the IRS. One of the most misused tax breaks is the earned income tax credit. Because it is complex, many individuals seek professional tax help to file this claim.

The questionable activity isn't limited to entries on tax forms. The IRS says unscrupulous preparers frequently make money off of clients by:

• Diverting a portion of the refund for their own benefit,
• Charging inflated fees and
• Attracting more customers by guaranteeing larger refunds than the competition.

"The vast majority of return preparers are honest and reputable," says Palmer. "Those who aren't can create considerable financial problems for their clients. Taxpayers need to keep in mind that they are ultimately responsible for their tax return."

Professional guidance excuse axed
Since the taxpayer must bear the brunt of any filing mistakes, innocent or otherwise, it's crucial that individuals fully understand any tax-reduction moves a preparer may suggest.

Such caution is even more important now, as the U.S. Treasury Department (of which the IRS is a part) has decreed that the old "my tax adviser said it was OK" argument will no longer work.

"Too many tax advisers have counseled clients against disclosing their transactions with the expectation that the advisers' opinions will allow the clients to avoid penalties," said Treasury Assistant Secretary for Tax Policy Pam Olson in announcing the rule change.

"We are raising the stakes for taxpayers who fail to disclose potentially abusive transactions," continued Olson. By removing the tax-adviser argument, tax officials now believe taxpayers' risk-to-reward calculations will be more judicious, eliminating what Olson describes as "inappropriate tax avoidance transactions."

To make sure your return follows tax law, review all paperwork before signing, ask questions on entries that are unclear and get a copy for your files. And never sign a blank tax form or one filled out in pencil.

If you suspect your tax professional is giving you illegal advice, call the IRS toll-free tax fraud hotline at (800) 829-0433. Preparers who are convicted of felony tax evasion can face up to five years in prison and a fine of $250,000.