Tax season is quickly approaching. According to its website, the IRS received 149,684,000 individual income tax returns in 2014 as of December 26, 2014 (2014 Filing Season Statistics). Of these returns, the IRS states that more than half were prepared by hired tax professionals. If you decide to hire a tax professional to prepare your tax return this year, it is essential to choose them carefully to avoid hiring an abusive return preparer.

What is an abusive return preparer?

The IRS defines a return preparer as “any person (including a partnership or corporation) who prepares, for compensation, all or a substantial portion of a tax return or claim for refund under the income tax provisions of the Internal Revenue Code.” An abusive return preparer is a return preparer who engages in return preparer fraud, which involves preparing and filing false income tax returns.

An abusive tax return preparer may use different methods to commit this type of fraud. For instance, he or she may prepare a false Schedule C, Profit or Loss from Business, to claim deductions for fake expenses to counterbalance income derived from outside employment. Another method is to take false and overstated deductions on Schedule A, Itemized Deductions, for charitable contributions and medical expenses. An abusive return preparer may also claim fake Schedule E, Supplemental Income and Loss, losses. Finally, he or she may include impermissible credits or excessive exemptions to lower taxable income or taxes owed.

How do you avoid an abusive return preparer?

To avoid an abusive return preparer, the IRS lists several helpful tips on its website:

• Avoid preparers who advertise higher refunds than others.
• Do not hire preparers who charge based on a percentage of the refund.
• Use a reputable and competent return preparer who signs and enters a preparer tax identification number (PTIN) on your tax return. This includes considering what professional credentials the return preparer has and to which professional organizations the preparer belongs.
• Never sign a blank return.
• Make sure the preparer will be available after your return is filed.
• Ensure that any refund goes directly to you and not to the preparer’s bank account.

Regardless of whether or not you hire a return preparer, remember that you are responsible for the information on your tax return, including all related schedules, forms, and supporting documentation. If there is something on your return that does not make sense or that you do not understand, always ask your return preparer to explain it and correct it, if necessary. You do not want to be liable for additional taxes, interest, and possible penalties when the IRS discovers your false return.

As tax season begins to draw to an end, the Internal Revenue Service is issuing its annual “The Dirty Dozen” warning to consumers about fraud on and by taxpayers.
This year’s list is little changed from 2012, and is again headed up by identity theft. A growing problem every year worldwide, the IRS is stepping up its vigilance in this area, from establishing an Identity Protection Web Portal, and increased prosecution of offenders. Last year over $20 billion in fraudulent refunds were prevented, up from $14 billion in 2011.

Another scam is “phishing”, where taxpayers are sent fake e-mails asking them to provide the IRS with sensitive personal information such as social security numbers. A good rule of thumb to remember is that the IRS never will attempt to contact you by e-mail, text message or social media.

Tax fraud is not just committed by outsiders, however. Unscrupulous tax preparers are also lurking. The amount of fraud committed (or attempting to be committed) by taxpayers rises every year as well.

Beware of any tax preparer that offers to get you “free money” by claiming tax credits that you do not in reality qualify for. Some preparers have also been known to exaggerate wages or self-employment income to inflate refundable credits.

Taxpayers have also been known to try to avoid taxes with hiding income offshore. While offshore income was always reportable income, only in recent years did it come to light that many people were not in fact reporting it. In 2009 the IRS implemented an Offshore Voluntary Disclosure Program that to date has 38,000 participants. In 2012, the program was extended indefinitely. Penalties for not reporting this income can be steep.

So whether it’s a scam artist, an unscrupulous tax preparer or just you, remember that the IRS is watching out for you AND over you.