Personal Finance

What to do when your tax preparer screws up

When one of Laurie Ziegler's clients came to her with an IRS notice that they owed more than $10,000 in taxes, penalties and interest for a past tax return, the Wisconsin enrolled agent did a double take.

Not only did the couple's former preparer, whom they'd already paid, put on the return that it was self-prepared, but "in reviewing the return, I found out that the preparer had made other mistakes." In the end, the couple was due a refund in excess of $5,000 between federal and state taxes. If it had gone the other way, they would have been on the hook for penalties and interest for the preparer's mistake.

Tax return mistakes are often accidental, like when a client tells the preparer a wrong amount, or the preparer calculates incorrectly. Other times, mistakes are downright deceitful (think: inflating deductions to get a client a bigger refund or omitting information to maximize the federal earned income credit).

Though enrolled agents, CPAs and tax attorneys are governed by standards of professional responsibility and IRS ethics, more than half of the 79 million returns filed by paid tax preparers are not bound by those rules.

Taxpayers can take a few steps to protect themselves from lengthy IRS and state agency battles and pricey penalties, if they've been bamboozled by a preparer.

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Don’t sign the return without carefully reviewing it

At the end of your tax return, there is a statement that under penalty of perjury, the taxpayer believes the information to be true and accurate.

This can hurt you when it comes time to defend your return if there is a serious mistake, said Paul Ambrose Jr., tax partner at the law firm Cullen and Dykman in New York. If you don't understand something or think it may be incorrect, ask the preparer to explain or correct it before signing.

Use a licensed professional

Anyone can legally prepare a tax return for compensation as long as they have a Preparer Tax Identification Number from the IRS, which costs $50 and takes 15 minutes to obtain.

Earlier this year, the Senate Finance Committee passed legislation designed to help curb identity theft and tax refund fraud, but an amendment containing recommendations for protecting the public from incompetent and fraudulent tax preparers, including requiring unlicensed PTIN holders to inform taxpayers about the differences between preparers, was shot down.

And when the IRS tried to implement competency requirements for all tax preparers in 2014, the District Court for the District of Columbia ruled that the IRS did not have the authority to do so.

Since there are currently few protections against shady tax preparers, choose carefully at the beginning, says Cari Weston, director of tax practice and ethics for the American Institute of CPAs.

It's like finding a doctor. "There are going to be highly qualified people everywhere, but you don't want to just go to anyone," she said. "Look for referrals, double-check [the tax preparer's] license and whether there have been any complaints."

Pay a flat fee

Avoid tax preparers who offer to take a percentage of your tax refund, rather than a flat fee, Ambrose said. They are incentivized to boost deductions where they may not be accurate or legal, and are eventually caught by the IRS.

"It takes time for the IRS to catch them but eventually they connect the dots," Ambrose said.

When all else fails, complain

Before filing a complaint, consider giving the preparer a chance to make things right if it was an honest mistake, said Weston, especially because the IRS itself can also be wrong during the auditing process, particularly when relying on its computer generated matching system.

If the preparer is responsible for a mistake resulting in penalties and interest, the preparer may pay them directly to retain the client or appeal to the IRS to get them abated, saidZiegler, who is chair of the ethics committee for the National Association of Enrolled Agents. Enrolled agents are credentialed by the IRS to handle tax returns for any taxpayer without restriction.

On the other hand, if the tax preparer made an intentional or fraudulent mistake, do not go back to them to fix it, Weston said.

Rather, file a complaint with the Office of Professional Responsibility at the IRS and the respective state agency under which the preparer is licensed, if any. After completing an investigation, the IRS could revoke their identification number and the state agency could revoke or suspend the tax preparer's license.

If the tax preparer is a member of a professional organization such as the American Institute of Certified Public Accountants (AICPA), the National Association of Enrolled Agents (NAEA) or a state bar association, a taxpayer can also file a complaint with their respective ethics committees. Pending investigation, it could result in sanctions like suspension or expulsion, Ziegler said.

If the tax preparer is not state-licensed or registered with the IRS, the only recourse is legal action, a logical step if the penalties and interest are very high and exceed the tax owed, Ambrose said, and if the statute of limitations, which is typically within a few years of discovering the problem, has not expired.