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Jeff Schnepper

The Basics

Is your tax preparer a crook?

If a tax pro offers to quadruple your deductions or eliminate your tax bill, be wary. Without stricter licensing rules, you'll have to watch your own back.

By Jeff Schnepper

It's something most people find impossible to believe. A tax preparer might not be just incompetent. He might be a crook. And you're vulnerable.

It happens.

During the 2008 filing season, staff members of the Treasury Department's Inspector General for Tax Administration anonymously visited 28 tax-preparation businesses to have taxes prepared. Only 39% of the returns were accurate.

Of the 61% that were wrong, two-thirds of the mistakes were due to human error or misinterpretation of the law. The other third were due to reckless or intentional misconduct.

In other words, more than 20% of the returns were prepared by, well, crooks. Crooks who are in business to make a buck and maybe make you happy. What they are not in business to do is to help you prepare and file an accurate return.

You can read a discussion of the problem here (.pdf file).

I get various tax updates of news and new rulings. Just about every day, I read about an accountant or attorney losing his license or being charged with some form of tax fraud.

I've met some of these people personally. They're charming and appear knowledgeable.

I knew Jesse Cota. He was a former district director for the Internal Revenue Service. He had 33 years of experience with the agency.

He was also a crook. After becoming a paid tax preparer, he clearly misrepresented the availability of home-office deductions and conspired to defraud the IRS. He continued to do so even after being corrected on several occasions. He's now in jail.

Last year, I represented a whistle-blower who had exposed a whole office of crooked accountants in New York City to representatives of the Justice Department and the IRS. He alleged that preparers were instructed by the certified public accountant who owned and ran the business to both create and inflate deductions, regardless of whether they were actually paid.

The case is continuing, and the whistle-blower expects a big reward at its conclusion.

Bogus deductions

Rogue tax preparers make lots of money, at least until they get caught. Their clients receive huge refunds and provide convincing referrals and testimonials. Think of them as Bernie Madoff with a 1040.

Most of these taxpayers won't ever be audited. Any who are selected normally won't get a letter from the IRS until 18 months after the return is filed. And a crooked preparer can easily delay the audit and any final notice of deficiency for an additional two or three years. (A deficiency is when the IRS issues you a bill and you have 90 days to file an appeal with the U.S. Tax Court or pay up.)

During that time, he's still preparing returns, he's still a tax superman, and he's still raking in those big bucks.

Then the IRS finds him, and all his clients are audited.

Video: More time for homebuyer tax credits?

I had a client come to me after years with the "best tax preparer on the East Coast." The preparer had suggested he take a home-office deduction. Then he deducted the whole cost of the client's house. When caught, the client had to pay the taxes. But the preparer's conduct was so outrageous that I was able to get all the penalties dismissed.

My favorite is the "bubble" deduction as a medical expense. Because the client lived in "polluted" New Jersey, the preparer estimated the cost of a bubble of pure air to surround the client and wrote off that cost as a medical deduction.

I would love to have been a fly on the wall listening to the preparer argue that one to the IRS auditor.

Continued: Who are the preparers?

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