As filing season starts to get into high gear, the IRS is reminding taxpayers to be weary of return preparers who promise huge refunds by claiming bogus deductions, credits or expenses. Taxpayers are ultimately responsible for all of the information on their returns. In addition to sanctioning dishonest preparers, individual taxpayers may be fined or criminally prosecuted, the IRS warned.

To address this issue, last month, Nina Olson, the National Taxpayer Advocate, urged the IRS to toughen penalties for return preparer fraud. Olson found that current monetary penalties are not discouraging abuse.

Red Flags

In its hunt for return preparer fraud, the IRS is looking for:

• Inflated personal or business expenses
• False deductions
• Unallowable or bogus credits
• Excessive exemptions

The IRS has also identified common tactics used by dishonest return preparers. These include:

• Preparing false Schedule Cs to claim deductions for non-existent business expenses to offset income
• Fraudulent Schedule Es
• Bogus dependents

The agency's Criminal Investigation Division has a special program focusing on enforcing compliance among return preparers. In 2003, the IRS initiated 229 investigations into preparer fraud. Nearly 170 cases were recommended to the Justice Department for prosecution and 109 indictments were handed-down. The government secured convictions in 67 cases.

So far, during fiscal year 2004, the IRS has initiated more than 30 preparer fraud cases and has obtained indictments in 24 cases. Overall, 2004 numbers should track 2003--if not higher.

Taxpayer Responsibilities

As in past years, the IRS recommends that taxpayers trust only reputable preparers with their financial and tax information, returns and filings. Taxpayers should consider if the individual preparer or firm will be in business to answer questions about preparation of their returns months or even years after they are filed. If taxpayers have any doubts about the reputation of their preparer, the IRS urges them not to sign their returns until all their questions have been answered to their satisfaction.

Related items:

IRS Launches New Program for Business Taxpayers

E-Filing Gains in Popularity

The Clock Is Ticking on Tax Savings

IRS Deadline for Retirement Plan Amendments Nears; Avoid the Penalty

Tax Rate Projections for 2004

Third Largest Tax Cut Package Enacted

Congress Passes $350 Billion Tax Cut Bill

How Should You Handle Bogus W-4 Submissions from Employees?

Senate Approves Tax, Economic Growth Bill

House Passes $550 Billion Tax Cut Plan

Who Really Pays Income Taxes?

Analysis of Bush's 2003 Tax Cut Proposal

New Year Rings in New Tax Laws

It's Not Too Late To Lower Your Taxes for This Year and Next

New Tax Cut Helps Small Business Owners Save for Retirement