Protecting clients during filing season means spotting bad tax preparers. This is especially important in the wake of pandemic relief.
“Red flags this year and areas of confusion will abound with the [Paycheck Protection Program], Employee Retention credits and other aspects related to businesses and the self-employed,” said Morris Armstrong, enrolled agent and RIA at Armstrong Financial Strategies in Cheshire, Conn. “A huge red flag would be a tax preparer who suggests that you had Covid to take advantage of some credits.
“When you sign a tax return, you are signing it under threat of perjury and you are responsible for the information,” he added. “I’m signing the return to the best of my knowledge and as a professional performing due diligence. A bogus preparer will often include made-up businesses showing losses, charitable contributions that never happened and who knows what else.”
The IRS again this year warns that dishonest return preparers use varied methods for reducing taxable income, including false and inflated itemized charitable or medical deductions and claiming false dependents. Unscrupulous preparers may also require payment in cash only and not provide a receipt and direct refunds into their own bank account.
This season, the IRS also cautions about “ghost” preparers who refuse to sign returns they prepare. By law, anyone who is paid to prepare or assist in preparing federal tax returns must have a valid preparer tax identification number (PTIN). Paid preparers must sign and include their PTIN on the return.
Circular 230, which governs those enrolled to practice before the IRS, prohibits fees as a percentage of refund on an original return, Armstrong added.
“Generally, wealthier clients don’t use the services of a tax preparer that will guarantee or take a percentage of their tax refund,” said Gail Rosen, a CPA in Martinsville, N.J. “The mistake a high-net-worth individual might make is hiring a tax professional who prepares tax returns as a side job. As life has become more complicated, so has the tax law.”
Other red flags can include a one-person office with no ability for a fresh review and an office that doesn’t return emails or calls, Rosen said.
Ask a preparer about their expertise on new tax legislation and if their tax software is sophisticated enough to handle security and complex tax situations. Consider whether the preparer will be around to answer questions about the preparation of your return months or years after filing, and never sign a blank tax form.
“Many only prepare a tax return and don’t engage in tax planning,” said Larry Pon, a CPA in Redwood City, Calif. An example, he said, might include suggesting a client set up a tax-advantaged retirement plan. “And stay away from anyone who advertises. Good professionals don’t need to advertise. They get referrals.
“It is amazing how many wealthy people use retail software to do their own tax returns,” Pon added. “Experience matters. You can’t just rely just on the software.”
The right preparer can save wealthy clients money and headache – though wealthy clients don’t always appreciate that. “At a past firm, I had clients worth millions of dollars and they complained about a $500 or $1,000 tax-prep bill,” said Bruce Primeau, CPA and president at Summit Wealth Advocates in Prior Lake, Minn. “Going with the lowest-priced tax preparer isn’t a great plan. A good preparer should also be able to provide some feedback as to potential opportunities to save tax moving forward.”
The right preparer who is new for a client can also help fix earlier tax messes. Armstrong added that his experience examining a prior year’s return done by another preparer sometimes reveals questionable use of filing statuses and deductions.
“The IRS plans on being more aggressive against these types of preparers,” Armstrong said.