Tax Preparation Scams

In this world,” Benjamin Franklin once wrote, “nothing can be said to be certain except death and taxes.” Franklin never encountered the 9,834-section Internal Revenue Code that Americans must abide by, otherwise he could add annual tax hassles to the list of life’s certainties.

A cottage industry of tax-preparation services has sprouted since Franklin filed his final 1099. In 2007, the most recent year for which U.S. Census data is available, tax preparers reeled in $5.25 billion in receipts. With that much money changing hands — in addition to even more income, charitable donations and the other tax write-offs preparers are trusted to monitor — the potential for fraud and unfair business practices runs high.

In recent years the industry has migrated online. Gone are the piles of paperwork and long phone calls. Real-time customer service is now a click away. While this has simplified the process of filing taxes for some, others have been frustrated by familiar issues with tax preparers such as confidentiality violations, poor customer service and lost forms.

So who’s to blame? Independent tax preparers might not have an established reputation, which should be a red flag for taxpayers seeking outside help. But even name-brand companies like H&R Block, Jackson Hewitt and Turbo Tax are not exempt from giving consumers headaches.

One H&R Block customer writing on the website PissedConsumer.com, owned by market research firm Opinion Corp, found that desperate times called for desperate measures. “I called a few days  later to see when my check would be in,” the customer wrote, “and was told that not only did they not e-file my return they could not locate my paperwork within the office. When I informed them I was going to file a police report, (I was concerned about identity theft), a manager from another office called me and told me that my paperwork had been found.”

Fortunately, filing taxes is one area where the government is on your side when the private sector fails. The Internal Revenue Service encourages you to report fraud — online, over the phone or in person
— if you suspect you’ve been cheated by a tax preparer. It’s in the government’s best interest to have only honest tax preparers, so it will be vigilant about keeping the frauds accountable. Note, however,
that individual taxpayers will be held responsible for any tax returns they sign and submit to both state and federal agencies.

One benefit of the digital age: The IRS will email one tax tip a day to anyone who signs up for the free advice on their website. For those who need more in-depth assistance, the Volunteer Income Tax  assistance program helps taxpayers who make $51,000 or less prepare and file their IRS returns. The Tax Counseling for the Elderly program is a similar service for seniors. Both are free and offered in many local areas. Between January and April, visit IRS.gov or call 800-906-9887 for a list of VITA sites. To find a TCE or AARP Tax-Aide site during this same period, go to AARP.org or call 888-227-7669 (888-AARPNOW).

In addition, the IRS offers Low Income Taxpayer Clinics at little to no cost to qualifying individuals. It’s a useful resource for non-fluent English speakers and anyone who can’t afford to hire a
lawyer to resolve a dispute with the IRS.

Regardless of your age or income bracket, never assume your tax preparer is as knowledgeable as he claims to be. Ask lots of questions whenever you do business with a tax preparer online, over the phone, or in person. If you don’t fully understand the answer, keep pressing until you do — providing detailed explanations are part of their job. If you file through a small company or individual, be especially careful to research their reputation, and get a firm quote or estimate of charges before you hand over your tax information.

Though both are guaranteed, death shouldn’t be preferable to filing taxes.

Ten Terrific Tax Tips

With the tax-filing deadline looming, here are ten tips to help make this year’s filing a breeze.

1. Lost your job? Could be good news!  You might quality for the Earned Income Tax Credit.  And since unemployment benefits do not count towards eligibility, only take your regular wages into account.  For a single, childless taxpayer, you need to make less than $13,980, with two children you qualify with less than $41,952. 

2. Report it all! If you did receive unemployment benefits, including disability payments or assistance that falls under the Disaster Relief and Emergency Assistance Act, you should have a Form 1099-G to report your income. 

3. Last call for the American Opportunity. The American Opportunity Tax Credit, which was introduced in the 2009 stimulus bill, was extended through 2012.  This means a credit of up to $2,500 of the cost of eligible education expenses, and up to $1,000 of this credit could come back to a taxpayer as a refund.

4. Pay attention to form 1099-K. This new form records payments received through third party networks like credit card companies or PayPal.  The form was introduced for 2011 over concerns that small businesses were not reporting all of their income.  Now that the IRS has access to credit card or online payments, this form ensures that parties keep it honest.

5. Gift fiving is good. In 2011 the estate tax was resurrected and the unified gift tax as well.  This means that you can give away $5 million in your lifetime without suffering the 35% gift tax.  Also, giving to charities can help to reduce your annual tax bill.

6. Only hire a pro. If you hire someone to prepare your taxes, ask him or her about their IRS registration status and verify it is in good standing.  Tax return preparers must fine their PTIN (Preparer Tax Identification Number) with each submission, and over time the IRS has made tax preparers more accountable to the numbers and their filings.  It has been proposed that they will need to prepare proposals with their fingerprints, and as of this year, pass competency exams.

7. Accelerate income. The top income tax bracket in 2012 is 35% of annual taxable income.  This could jump to 39.6% in 2013, so if you are in the top tax bracket, you may wish to opt to accelerate income into 2012 and pay taxes at a lower rate.

8. Don’t overpay tax prep. Check out this tax preparation cost comparison on NerdWallet.com and compare the benefits of using Turbotax vs. H&R Block to do your taxes.

9. Choose the right form. The 1040EZ offers only the Earned Income Tax Credit, while the longer 1040 offers education and other credits. 

10. Always file an extension. If you simply can’t complete and fine on time, file for that extension to avoid penalties and interest.