Alabama lawyer Maceo Kirkland represents low-income people with tax problems, many of whom owe thousands of dollars to the IRS for a single infuriating reason: Their tax preparer lied on their return.
When the lies are discovered, the IRS sends the taxpayer a letter demanding repayment — plus penalties. That’s when the taxpayer comes to Kirkland. “A lot of them are surprised, if not downright flabbergasted” to learn about the claims in their returns, he said. They did not realize their refunds were larger than warranted, and often they have already spent the money.
The fraud is widespread but rarely prosecuted.
IRS records obtained through a public records request show that more than 112,000 people have reported fraud or misconduct by their tax preparers over the past decade, including complaints that preparers edited taxpayers’ returns without consent, made up dependents and income that did not exist, and faked W-2s and other documents to increase refunds.
Even when taxpayers do complain, neither the IRS nor federal prosecutors have prioritized prosecution of unscrupulous tax preparers, leaving low-income families on the hook.
The IRS penalized 2,292 preparers in fiscal 2018, the most recent year for which data is available, for “willful or reckless conduct” or for rule violations such as turning in a return without signing it. The IRS’s Taxpayer Advocate Service said those penalties were delivered “very sparingly” compared with the likely frequency of misconduct; more than 11,000 taxpayers reported misconduct by their preparers that year.
The IRS very rarely takes more serious action, disbarring just one or two preparers a year and suspending fewer than 70 annually for any reason, though often for this type of fraud, the Taxpayer Advocate Service told Congress.
The Justice Department’s annual report this year on criminal convictions of tax preparers listed just five criminal convictions of preparers for lying on clients’ returns in the past year and three actions barring defendants from working as preparers again. Those who did face criminal charges included preparers who invented fake businesses for their clients, sometimes racking up millions of dollars in unjustified refunds.
IRS officials declined to make anyone available to discuss preparer misconduct. In an emailed statement, the agency said it takes the issue seriously and is working to address it more vigorously.
“In November 2020, the IRS developed a service-wide strategy regarding return preparers and began implementing critical technological and procedural advancements. Certain return preparer penalty cases are now centralized to more consistently and efficiently develop and assert return preparer penalties,” the statement said. The agency publicly advises taxpayers to be cautious when hiring tax preparers, urging them to choose professionals who charge only an upfront fee, never a portion of the refund, and to be certain that the preparer signs the return.
Jada Bones, 25, said she complained to the IRS about a tax preparer who filed a phony return for her, leaving her with a hefty tax bill. She said the agency never responded. (An IRS spokesman said the agency would not comment on any individual report.)
She said the preparer filled out people’s tax returns in his home and charged her $150 upfront plus a percentage of her refund.
Bones said she didn’t realize something was wrong until two years later, when she started getting letters from the IRS saying she owed about $2,500 to pay back refunds she wasn’t entitled to, plus $500 in penalties and interest.
That’s when she said she learned that the tax preparer had made claims on her tax returns that were untrue — saying she deserved education credits when she hadn’t been taking college classes; filing claims for business expenses when she didn’t own a business. (The preparer denies her allegations; his name is being withheld because the IRS has made no determination in the matter.)
“I think a lot of the people that he deals with are people who won’t fight back,” said Bones, who lives in Albany, Ga. “We just find a guy in a button-up shirt that looks trustworthy and say, ‘Yeah, do my taxes.’”
The IRS emphasizes that the taxpayer has a legal responsibility to read over their own returns.
In a 2018 report to Congress, the IRS’s Taxpayer Advocate Service identified unregulated preparers as one of the “most serious problems” with the nation’s tax regime. “When one visits a hair salon, the hair stylist will have a certificate displayed, which attests to the fact that the stylist has undergone the training necessary to obtain the license,” the report says. “In contrast, there is no such guarantee that an unenrolled tax return preparer has passed any exam, continues to engage in ongoing education, or meets any other minimum standard of competency to prepare federal tax returns.”
The IRS instituted a test for tax preparers in 2011, but in 2013, the U.S. District Court for the District of Columbia found that the agency didn’t have the authority to do so without a vote of Congress.
The next year, a report by the Government Accountability Office found that more than half of all tax preparers have no formal credentials and are not subject to any IRS regulation — and that those preparers were significantly more likely to make false claims, whether due to unintentional mistakes or intentional misconduct, than taxpayers who filled out their tax returns on their own. (Taxpayers can look up preparers’ credentials in a federal directory.)
Nina Olson, a former IRS taxpayer advocate, once described the tax preparer industry as the “wild, wild west,” and multiple bills to regulate the industry have stalled in Congress. Most recently, Reps. Jimmy Panetta (D-Calif.) and Tom Rice (R-S.C.) introduced legislation in 2021 to require tax preparers to pass a test and to further regulate the industry. The bill didn’t make it out of the House Ways and Means Committee.
For years, Oregon was the only state that required paid tax preparers to pass a test to stay in business. In 2008, the GAO found that returns from Oregon were 72 percent more likely to be accurate than those submitted in the rest of the country. Maryland started requiring tests for tax preparers that year.
But some argue that regulation would mostly benefit the professional accountants who have advocated for it, at the expense of mom-and-pop tax preparers.
“Overwhelmingly, the average tax preparer is doing their very, very best to produce accurate returns,” said Patrick Mullen, a New York attorney who represents preparers who are audited or investigated. “The ones that go astray, they overstate deductions that shouldn’t be there. Whether you have regulation or you don’t have regulation, that’s going to exist. The unscrupulous are going to do whatever they have to, whether you have regulation or not.”