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Tax preparer fraud refunds addressed

By Kay Bell · Bankrate.com
Thursday, July 17, 2014
Posted: 10 am ET

The Internal Revenue Service has been grappling with ways to ensure that taxpayers find competent professional help in filing their taxes.

That's all well and good, says the National Taxpayer Advocate in her report issued July 16. But in the meantime, the IRS has been sorely mistreating folks who've already fallen victim to tax preparer fraud.

National Taxpayer Advocate Nina Olson

National Taxpayer Advocate Nina Olson

In her midyear report to Congress, Taxpayer Advocate Nina Olson says that while the IRS has been working hard to quickly issue refunds to identity-theft victims, it has generally declined to issue any refunds at all to victims of preparer fraud.

"The IRS has consistently dragged its heels, making one excuse after another, because providing relief to these victims just is not a high enough priority, or more disturbingly, because the IRS simply does not want to provide relief," Olson said in a statement.

The IRS' inaction, says Olson, is further harming taxpayers who've already become victims of return preparer fraud by keeping those individuals waiting, sometimes for years, for their rightful tax refunds.

Preparer fraud process

In a typical preparer fraud case, a taxpayer visits a preparer for assistance in filing an annual return. The preparer completes the return. The taxpayer reviews it, authorizes the preparer to file it electronically, and often pays the preparer's fee.

However, notes Olson in her report, after the taxpayer leaves, the unscrupulous tax preparer alters the return by inflating income, deductions, credits or withholding without the client's knowledge or consent. The preparer then pockets the entire refund, or the difference between the revised refund amount and the amount the taxpayer expected, often by changing the bank account routing number so the refund is transmitted to the preparer's own account.

The taxpayer who doesn't receive the refund is out of luck. Victimized taxpayers often have little hope of obtaining their refunds from the preparer, who may have closed up shop and disappeared, says Olson.

While the number of tax preparer fraud victims is not as numerous as tax-related identity theft -- hundreds of thousands have suffered ID theft versus hundreds who've been ripped off by bad tax preparers -- it is a persistent problem. Unscrupulous tax professionals regularly make the IRS' warning list of Dirty Dozen tax scams.

Olson also has covered this subject in three of her annual reports to Congress, as well as taking dozens of actions directly as the National Taxpayer Advocate and leader of the Taxpayer Advocate Service, an independent organization within the IRS to solve taxpayer problems. And despite the issuance by the IRS Chief Counsel of four opinions and other guidance that, read together, authorize the IRS to issue replacement refunds to victims of return preparer fraud, Olson says no such refunds have been paid.

Some of the victims of tax preparer fraud have, according to Olson's report, been waiting for refunds due from their 2008 tax return filings.

"Yet in all this time, the IRS has chosen not to take the actions necessary to assist victims of preparer fraud," Olson writes in her latest report. "Nowhere has the IRS failed to abide by the [recently announced Taxpayer Bill of Rights] more than with respect to the issue of return preparer refund fraud."

IRS action imminent?

When taxpayers are victims of tax fraud due to identity theft, the situation is pretty clear cut. Personal information is stolen, either by physically gaining access to the data or through phishing or other schemes, and used to impersonate the taxpayer during the filing season.

With tax preparer fraud, however, the problem from the IRS' point of view is the victims' possible complicity in the collection of the refund.

The good news, Olson notes, is that IRS Commissioner John Koskinen has told her that the agency will issue refunds to tax preparer fraud victims who provide a copy of a police report on the incident.

This official law enforcement document will ease IRS concerns about collusion between the preparer and taxpayer. However, some victims will still be unable to get their refunds, says Olson, because the police department in their area does not accept reports related to tax fraud. Others will be unable to file a report for an incident that occurred several years ago.

The Taxpayer Advocate's office is working on guidance on acceptable alternate documentation that will satisfy the IRS in such cases.

The IRS Chief Financial Officer also has raised concerns about the proper accounting entries necessary for the tax preparer fraud refunds.

While these are legitimate concerns, Olson tells Congress in her report that she would like these issues resolved immediately so that refunds are not further delayed. Her specific timetable: IRS to start issuing refunds by Oct. 1.

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You also can follow me on Twitter: @taxtweet.

Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and co-author of the e-book "Future Millionaires' Guidebook."

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