Using a Paid Tax Preparer? Check for These Issues Before Signing Your Return

Everyone wants to maximize their tax refund or at least minimize what they owe.  This dynamic can motivate less-than-honest tax preparers to use the following techniques to increase your refund.  Know what to look for so you don't find yourself in hot water with the IRS or State.

 1.  Fake Business Loss.

A business loss on Schedule C can be used negate your income from other sources such as wages.  Unscrupulous tax preparers create a fake business loss on Schedule C to reduce your taxable income.

What to look for:  

  • Schedule C when you didn't have a business.
  • Business expenses that you didn't incur.
  • A negative number claimed on Schedule 1 Line 12 for Business Income (or Loss).

2. Overstated Itemized Deductions

The Tax Cuts and Jobs Act increased the standard deduction and eliminated or capped several itemized deductions.  Therefore, less taxpayers should be using Schedule A to claim itemized deductions.  That doesn't mean tax preparers won't continue to use this illegal technique to reduce taxable income.

What to look for:

  • A deduction for employer paid healthcare or other medical expenses you didn't incur on Schedule A line 1 .
  • Overstatement or fabrication of charitable contributions on Schedule A Lines 11, 12, and 13.
  • Other itemized deductions that you didn't incur on Schedule A Line 16.

3. Ghost Preparers

If you pay someone to prepare your income tax return, then they are required to list themselves as the paid preparer on Form 1040.  If your preparer has not listed themselves as the paid preparer of your income tax return, then you should not sign and submit the return.  This is an indication that the preparer may not be authorized to prepare income tax returns or they are including tax items with which they do not want to be associated.

What to look for:

  • Your tax preparer's name and PTIN as well as their office's EIN, address, and phone number should be listed in the section labeled Paid Preparer Use Only.

4. Direct Deposit of Refund

Don't allow a dishonest tax preparer to steal your tax refund.  Make sure the refund is being sent in whole or part to your bank account.   If you are paying your preparer directly then only your bank information should be listed on Form 1040 Lines 20a and 20b.  If your preparer is being paid with a portion of your tax refund, then make sure that you are in agreement with the amounts listed on Form 8888.

What to look for:

  • Ensure your bank information is listed on Form 1040 Lines 20a and 20b.
  • If you are paying your preparer from your refund, then make sure Form 8888 lists both your bank account and your preparer's bank account with the amount of payment to the preparer being the agreed upon fee.

5.  Obtain a copy of the return.

There is always a risk that your preparer will change the return prior to submitting the return electronically.  Make sure you obtain a complete copy of the tax return so that you have a copy should your preparer make unauthorized changes.  Should your return be selected for audit, then at the very least you will have a copy of the return with the numbers you agreed to submit.

What to look for:

  • A paper or electronic copy of your income tax return including all Schedules and Worksheets.
  • A signed copy of Form 8879.