Crooked tax preparers can ensnare taxpayers of any income. But wealthy clients may be vulnerable to more complex and subtle scams, according to advisors.
“Sometimes wealth and financial savvy don’t go together, and many people are trusting,” said Morris Armstrong, enrolled agent and RIA at Armstrong Financial Strategies in Cheshire, Conn.
“Just about anyone can fall for a scam or someone overselling their abilities,” added Annette Nellen, a CPA, attorney and professor at San José (Calif.) State University.
“A taxpayer’s needs will determine which kind of preparer is best for them,” the IRS said in this year’s warning about preparer red flags. “Taxpayers are ultimately responsible for all the information on their income tax return, regardless of who prepares the return.”
What should you watch for? Some red flags are standard for all taxpayers, including preparers not signing returns (a “ghost preparer”); no year-round availability; fees based on sizes of refunds; claims of refunds that will be bigger than their competitors can get; and electronically filing a return using only a paystub and not a W-2 or other tax form.
“Look out for preparers who don’t probe, who look for percentages and who guarantee refunds,” Armstrong said. Instead, he said, look for tax planners who provide an honest appraisal of your taxes. “Look for a person who will tell you ‘Not allowed,’ even if you may not like to hear that.”
The wealthier the client and more complex the return, the sharper should be the questions—on both sides of the desk.
“Clients need to have a good understanding of their tax situation so they can ask questions,” Nellen said. “For example, if they have foreign assets either directly or through a mutual fund or otherwise, they need to check on the international tax knowledge of their preparer. If they own interests in partnerships, earn income in more than one state, have their own business, have crypto assets, or anything beyond a W-2 and 1099-INT, these items are where they should check the knowledge and experience of their preparer.”
“Anyone using a paid preparer should find out about their education, any license, how they stay up to date and their main area of focus—individuals, for instance, S corps and so on,” Nellen said.
“They should also ask what all the preparer will or won’t provide,” Nellen said. “Will they just prepare the return or also help with recordkeeping and tax planning for the current year?”
The IRS also recommends reviewing your new preparer’s history, checking with the Better Business Bureau and for disciplinary actions and the license status for credentialed preparers; check CPAs with state regulators and attorneys with a state’s bar association. For enrolled agents go to IRS.gov and search for “verify enrolled agent status” or check the IRS Directory of Federal Tax Return Preparers.
“A preparer should be interviewing you and either having you complete an organizer or completing it during the interview,” Armstrong added. “They should ask you about foreign bank accounts and trusts and cryptocurrencies. They should look at prior years’ returns for historical purposes and to look for carryforwards.”
“If you aren’t a business owner, you shouldn’t have a Schedule C on your return. If you don’t have rental real estate, you shouldn’t have a Schedule E. And yet, those are often found on fraudulent returns. If you have large charitable contributions and the preparers say, ‘Don’t worry,’ worry,” Armstrong said.
Enrolled agents are prohibited from charging fees based on the percentage of refunds, Armstrong noted. “A preparer should always sign a return and have a PTIN (preparer tax information number) [and] an ID number issued by the IRS. A background check is conducted before a PTIN is issued. PTIN numbers are public record, and many states also require [some] preparers to register.”
Financial advisors should always make sure that they have permission from their clients to speak with the tax person, Armstrong said.
Preparer misconduct is reported to the IRS using Form 14157.