Need Tax Advice? Look Here

By Patricia E. Mohr, April 2005

[From SHRM’s Consultants Forum]

More Americans are turning to a professional for help in filing their taxes every year. More than 72 million individuals paid for assistance in 2002, and it’s no wonder why: With tax laws constantly changing, it sometimes seems only a professional can keep up.

But paid advice does not necessarily equal good advice—and when you get bad advice, you’re the one who pays.

Is Your Tax Preparer Qualified?

Unfortunately, not all tax preparers keep up with changing tax laws. The Government Accountability Office estimates that as many as 2 million Americans overpaid the government last year because of bad advice from a paid tax preparer.

Others, meanwhile, paid too little, subjecting themselves to potential audits because either the preparer failed to ask the client the right questions and take the right deductions and credits, or they provided poor advice that led the client to file a fraudulent return.

Nina E. Olson, national taxpayer advocate at the Internal Revenue Service, says she has seen too many cases where taxpayers have turned to unqualified advisers for help without realizing the risks. “In all states except California and Oregon, all it takes to declare yourself a tax preparer is to hang out a shingle,” she said before a congressional committee last year.

Olson would like to see Congress regulate the roughly 300,000 to 600,000 tax preparers who, while working legally, are not required to obtain licenses to practice. She has pushed legislation to require tax preparers who are not already certified with the IRS to register with the agency and take periodic examinations on filing federal returns.

Such reforms might protect taxpayers from falling victim to unscrupulous advisers. In the meantime, however, taxpayers should strive to protect themselves. Understanding the risks of not doing so should provide ample motivation to do so.

When You’re a Victim

Last year the IRS initiated over 200 investigations into tax preparer abuses, which often included preparers who advised clients to claim business deductions the taxpayer has not really paid, declare someone as a dependent who does not qualify as one and inflate itemized deductions for charitable contributions, medical and dental expenses.

And if your adviser encourages you to transfer assets into a trust to shelter income or shift income into offshore bank and brokerage accounts or to use offshore credit cards, you should independently verify that they are legal. The IRS is investigating and prosecuting promoters of schemes and taxpayers who have used them, and it can be difficult to escape an examination once the IRS begins unveiling a promoter’s illegal scheme.

The IRS cites as an example the case of Leanne Denice Shrout, a tax return preparer in Irving, Texas, who pleaded guilty to filing 788 false tax returns on behalf of her clients between 1999 and 2002. She had advised her clients to deduct the cost of clothing, vitamins, haircuts, manicures, pedicures, and gym fees as business and medical expenses.

Shrout went to jail. Her clients, meanwhile, also paid for her crimes. Taxpayers are ultimately held responsible for the information on their tax returns even if a tax preparer admits to having misled them. The costs can entail additional taxes and interest, as well as penalties and criminal prosecution.

Fortunately, most tax advisers are reputable. You have a good chance of finding an ethical one if you choose someone affiliated with a professional organization that holds its members accountable to a code of ethics. The IRS recommends you choose someone who will be available to help you answer questions about it years after it is filed.

Meantime, consider avoiding preparers who claim they can obtain larger refunds than other preparers, base fees on a percentage of the amount of the refund, or ask you to sign forms before they are complete.

Finding the Right Professional

Tax advisers come in many different shapes and forms and it is often difficult to know what type of help to seek. You can categorize them into different levels of expertise and specialization and choose the type that best fits your financial needs:

Patricia E. Mohr, a freelance writer covering public policy issues, is the former senior Capitol Hill reporter for Tax Analysts in Washington, D.C.

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