Brad Sutton didn’t know what to think when a couple of special agents from the IRS showed up on his doorstep to initiate an investigation into his tax records. This was no typical audit to find errors and collect a few extra bucks for Uncle Sam. The agents warned Sutton this was a criminal matter. They claimed he had filed falsified tax returns (when he filed at all) and bilked the U.S. Treasury out of quite a hefty chunk of change in unpaid taxes and unearned refunds. (Names used are pseudonyms; the facts of the story are true.)

Sutton was mystified. He always filed his returns on time and paid his taxes in full – just ask his tax preparer, Sheila Johnston! As it turns out, Sheila had been living large at Brad’s expense and thumbing her nose at the IRS for years. She was pocketing clients’ tax payments and diverting undeserved refunds to her own bank accounts.

Who Can Prepare Taxes?

Anyone who pays a fee and passes an exam each year can legally prepare a tax return for an individual or small business. These tax preparers are registered with the IRS and the California Tax Education Council (CTEC) with a unique Preparer Tax Identification Number (PTIN).  However, they don’t necessarily have any other qualifications.

In contrast, a CPA has a college degree in accounting (which includes hands-on training in a public accounting firm) and a license from the state. An attorney typically has a general knowledge of tax and accounting law and is also authorized to prepare tax returns as part of legal services. An Enrolled Agent passes a special enrollment exam and is authorized to represent a taxpayer to the Internal Revenue Service.

Double Dipping from the IRS and Tax Clients Is Easy as 1-2-3

How did Johnston manage to retain Brad’s tax payments, fabricate and steal his refunds, and keep everyone in the dark for years?

First, she had Brad make out a single check to cover both his estimated taxes owed and her preparer fee. With her name occupying the “Pay to the Order of” line on the check, there was nothing stopping her from simply keeping the whole amount. She probably made it sound reasonable by saying she’d send the balance on to the U.S. Treasury electronically to save time and ensure the check didn’t get lost in the mail.

Second, she altered Brad’s tax return before sending it in. This is a common scam for shady tax preparers. It involves having the client sign a tax return and then adding extra numbers to existing amounts on the completed form or filling in blank boxes with phony amounts. It’s actually fairly simple for a tax preparer to add deductions here and there to turn a debit into a credit, earning a nice refund from the IRS. The more reasonable it looks, the longer it might take the IRS to catch a whiff of something fishy.

Finally, she changed the contact and bank routing information. Since Brad wasn’t expecting a refund, he had no reason to suspect that Sheila would fill out this section of the form with her own bank routing numbers. She knew the IRS would get suspicious and start sending inquiry letters after a while. So, she bought herself more time by changing the contact address as well. All the threatening letters from the IRS went to her own P.O. Box. Brad never got a single notice about the problems with his account until the case had escalated to criminal tax fraud and evasion.


Trust but Verify Your Tax Preparer’s Actions

The #1 reason crooked tax preparers can get away with these scams for so long is because tax payers abdicate responsibility for double-checking their returns after the fact. Even a conscientious client can make this mistake. In California, customer can verify that a tax preparer who isn’t a CPA, EA or attorney is registered with the state. But that’s just a first step. Even going over your tax return line by line before it is filed to verify accuracy isn’t enough. That information can be easily changed after you sign the forms. The critical follow up step is to request a full transcript of the filed return from the IRS each year. The transcript is mailed to you free of charge. With this documentation, you can easily tell whether your tax preparer has been playing it straight or playing you for a fool.

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Bruce Robertson

Bruce Robertson is a private investigator and founder of Tristar Investigation, California’s premiere detective agency. Bruce is also a media commentator for the investigation industry, featured in the New York Times, CNN, History Channel, MSNBC, Los Angeles Times and many more. You can find him on Google+ LinkedIn and YouTube.