When Your Return Preparer Betrays You

 Return preparer

Identity theft has been pervasive.  In an earlier blog (Identify Theft Pervasive, Overwhelms IRS(Dec. 1, 2014)) I discussed that while the IRS has increased its activity in the fight against tax-related identity theft, it is still overwhelmed.  One specific type of tax-related identity theft that may be harder than other types to combat is identity theft committed by the tax return preparer.  We readily entrust our tax return preparers with our personal information just as readily as we entrust the dentist with our teeth, however recent cases demonstrate that abuse of that position of private trust as a paid professional tax return preparer is more rampant than we may realize:

  • Recently a Georgia return preparer was sentenced to 259 months in prison and ordered to pay $7 million in restitution.  He led over 15,000 victims, including prison inmates and individuals living in homeless shelters, to believe that they could obtain “government stimulus payments” or “free government money” by providing him with their names and social security numbers. Fraudulent returns were filed and the preparer collected over $19 million in refunds for himself.
  • Another Georgia return preparerwas sentenced to 60 months and ordered to pay over $200,000 in restitution to the IRS.  He filed false returns in the names of deceased individuals and used the personal data from former clients to file returns without their knowledge or consent.
  • Still another Georgia preparer was arrested earlier this year in an investigation that revealed that, during the preparation of returns for legitimate clients, she and her business partner added false Forms W-2 to the returns to increase the refunds.  The preparers then pocketed the difference and the clients were not aware of the fraud. The preparers are also accused of stealing inmates’ identities to file false returns.
  • A Florida return preparerwas sentenced to 40 months in prison and ordered to pay over $200,000 in restitution to the IRS for a scheme in which he and a co-defendant obtained the personal information of students from an employee of the local public school system and electronically filed fraudulent tax returns using that information and the Preparer Tax Identification Number (PTIN) he obtained from the IRS that permitted him to identify himself as the preparer on the electronically filed returns.
  • A Missouri return prepareris accused of stealing the names and social security numbers of unsuspecting victims and filing 15 fraudulent returns without their knowledge and generating over $50,000 in improperly paid refunds.
  • A New Jersey preparerwas sentenced to 40 months and ordered to pay a $25,000 fine for using the personal information of clients and other individuals to file fraudulent returns without their knowledge or consent, often listing false information on the returns in order to obtain larger refunds.

While these are only a few examples of identity-related crimes committed by tax return preparers, they demonstrate the various methods and opportunities that are utilized to carry out the fraud.  It also appears that some groups are especially vulnerable to these schemes: the deceased, the incarcerated, and the homeless.  Even students are at risk! These crimes not only victimize those whose identities have been stolen and misused, but also the tax-paying citizens that will inevitably pay more in taxes because of the undue returns paid by the IRS just as consumers pay higher prices in stores because of store theft. 

One issue to consider is whether the growth of e-Filing is a major contributor to the increase in identity theft and what, if any, controls can be instituted to curb such crimes.  It also appears that tax return preparers may be in a more advantageous position in relation to non-tax professionals that commit tax-related identity crimes not only because we, as citizens, readily entrust return preparers with our information, but also because the preparers are more familiar with the IRS processes. We must be cautious in providing our personal information and especially vigilant regarding any correspondence received from the IRS.

Taxpayers that believe they have been the victim of identity theft, should contact the IRS Identity Protection Specialized Unit immediately at 800-908-4490 so the IRS can take steps to secure the tax account.  Taxpayers should also fill out IRS Form 14039, Identity Theft Affidavit, providing as much detailed information as possible about the circumstances.

To read more about tax-related crimes in the Tax Management Portfolios, see 636 TM, Tax Crimes; or Tax Practice Series ¶3830.14, Tax Crimes.