If he makes a mistake, you pay the price

Each year, taxpayers turn to professionals for help in preparing 82 million tax returns, partly to avoid running into trouble with the IRS and state tax agencies. But in various instances, some of those 1.2 million tax preparers get us into trouble instead.

Tax rules are so complex—and the typical return contains so many details—that even skilled preparers can make mistakes that trigger audits.

Example: When the Government Accountability Office examined the work of 19 randomly selected tax preparers in 2006, it found that six had significantly overestimated refunds due and almost all had made mistakes of some kind.

When preparers make mistakes, it’s their clients who pay the price. A taxpayer is legally responsible for his/her return, even when it’s a tax preparer who erred (although the IRS can pursue action against unethical preparers, too).

And an IRS or a state-tax audit isn’t the only danger we face when we go to a tax preparer—there also is the risk that the preparer might overcharge us.

Example: In 2010, tax attorney Roni Deutch, founder of a nationwide chain of tax-preparation offices, was sued for $34 million by the state of California for allegedly defrauding thousands of customers by making false promises about her ability to help them reduce debts they owed to the IRS. The chain eventually closed, and Deutch surrendered her law license.

Now is a good time of year to search for a tax preparer who might provide some valuable year-end tax tips. But you must be careful when choosing your preparer…


Five ways to reduce the risk that you will pick a preparer who gets you into trouble…

Check IRS and state databases for indications of past problems. The IRS often pays special attention to returns filed by preparers who have shown a willingness to play fast and loose with rules before. Taxpayers who hope to avoid audits would do well to avoid such preparers.

The Web sites of many state boards of accountancy allow visitors to search through lists of certified public accountants (CPAs) for ethical or malpractice violations. The Web site of the National Association of State Boards of Accountancy includes links to these state boards (nasba.org/stateboards).

The IRS Office of Professional Responsibility also reports sanctions and other penalties imposed on CPAs, tax attorneys and enrolled agents. Type the name of a tax preparer into the search box at IRS.gov to see if red flags such as these pop up.

However, these databases are unlikely to include storefront seasonal tax preparers, many of whom are not CPAs, enrolled agents or attorneys. There are no federal rules preventing people with no certification and little or no training from acting as professional tax preparers, though a few states do require licenses.

Ask preparers if they will pay the penalties and interest if they make mistakes that lead to a costly audit. Reputable tax preparers are likely to do this—and it gives them excellent motivation to avoid mistakes. Ask to have this confirmed in writing.

Make sure that the preparer asks you about the level of aggressiveness you are looking for. Some taxpayers stress the need to minimize the odds of an audit…others care more about lowering the tax bite as much as possible. A preparer who doesn’t ask where you stand on this question might not pay enough attention to his/her clients’ audit tolerance.

Watch out for refund guarantees. Don’t work with any tax preparer who promises to get you a refund (or a refund of a certain size) before he has started doing your returns. He might have to take significant chances and cut corners to make good on his promise.

If you own a rental property or small business, choose a tax preparer who has extensive experience with these. Returns featuring a Schedule E, Supplemental Income and Loss (the form that covers rental real estate, among other topics), and/or a Schedule C, Profit or Loss from Business, are particularly likely to attract attention from the IRS, in part because these forms are so complex that mistakes are common. If your return will include one of these forms, find a preparer who each year handles dozens of returns that include the form.

Helpful: Obtain targeted referrals. If you own rental property, don’t just ask your neighbor who does his/her taxes, ask an experienced area real estate agent or real estate attorney for a recommendation. If you have a small business, ask other small-business owners or your business’s attorney.


When the preparer gives you a completed return for your signature…

Check for major differences from last year’s return. Don’t assume that the preparer did everything right. Pull out the prior year’s return, and compare it with this year’s line for line. Give some thought to any major differences—lines that are blank one year but not the other…lines where the amount has changed by thousands of dollars. Is there an obvious reason why this figure changed so much? If nothing comes to mind, call the preparer, tell him what line of the return you’re looking at and ask him to explain the change. (Tax forms can differ slightly from year to year, so make sure that the lines you’re comparing cover the same topic before calling.)

Question any unclear tax credits. The IRS pays special attention to tax credits that are claimed on returns. If you’re not 100% certain why you qualify for a credit that your preparer has you claiming, confirm with him that you’re on safe ground doing so before signing.

Tax credits are reported on the second side of Form 1040. As of 2012, they were on lines 47–53, 64–66 and 70–71. Claiming the Earned Income Credit (EIC)—line 64a as of 2012—is particularly likely to attract IRS attention because it so often is claimed improperly.


Three ways to weed out tax preparers who might try to take financial advantage of you…

Choose a preparer who provides a cost estimate up front. Many preparers will supply estimates of their bills based on the forms that the client’s return is likely to require. Some preparers even list fixed per-form prices on their Web sites.

Make sure that your refund is sent to you. Confirm that the routing and account numbers on lines 74b and 74d of Form 1040 are for your bank account. Be extremely suspicious if your tax preparer has tried to route your refund to his account. This shouldn’t occur unless the preparer has given you a refund anticipation loan—and these loans charge such horrible interest rates that you should not agree to take one.

Steer clear of percentage-based billing. A tax preparer who charges based on a percentage of the client’s refund has an incentive to be overly aggressive.

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