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Watch Out for Tax Preparer Fraud, IRS Warns

NEW YORK (TheStreet) -- The Internal Revenue Service considers tax preparation fraud a serious threat to taxpayers -- it made No. 3 on the agency's list of "Dirty Dozen" tax scams last year.

The IRS says 60% of American taxpayers will rely on a tax professional to handle their taxes, and while it notes "most return preparers provide honest service to their clients," there are some tax preparation services that don't pass the IRS' smell test.

"Some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft," says the IRS in its listing.

The agency also warns taxpayers who use professional preparation services: They are legally responsible for their tax return, even if someone else handles the details. And they must watch out when a tax preparer guarantees a tax refund in exchange for a fee. Months later the IRS comes knocking with audit papers in hand and the "tax specialist" is nowhere to be found.

"Refunds are never a guarantee," notes Mary Beth LaMunyon-Jones, chairwoman of the California Tax Education Council. "Tax law is what it is. There is no magic formula to get around it. Either you owe or you don't."

Some states, including California, have raised the bar for tax preparation specialists, mandating that anyone who prepares taxes for a fee be an attorney, a certified public accountant or a council-registered tax preparer. In the Golden State, anyone caught breaking tax preparation laws can be fined up to $5,000.

To do your part in walling off tax preparation fraud, the council advises avoiding tax preparation firms and individuals who:

  • Cannot be verified as either an attorney, CPA, CRTP or EA.
  • Advertise "guaranteed" refunds.
  • Claim they don't have to sign your tax return.
  • Do not have a Preparer Tax Identification Number from the IRS.
  • Base their fee on a percentage of your refund.

If you are the victim of tax preparation fraud, the IRS encourages you to report the incident immediately. Start at the agency's tax fraud reporting website.

The IRS also offers a useful tutorial on how to hire a reputable tax specialist. Find it here.