Tax-Preparer Fraud Can Ruin Finances

Article excerpt

For Oscar Sotelo, tax season was a gold mine for two years running. He found a man who prepared taxes in California's Central Valley, promised big refunds -- and delivered.

Then the Internal Revenue Service letters started coming. Sotelo was never supposed to get that money; now, the IRS wanted it back.

The IRS says Sotelo was the victim in 2009 and 2010 of tax- preparer fraud, a widespread scam that can leave innocent taxpayers with a mountain of debt and put them in the crosshairs of the IRS. In this type of fraud, a tax preparer creates big refunds by lying on the tax return, giving both the preparer and taxpayer a nice payday. But when the IRS comes knocking, it's the taxpayer who's on the hook.

"There's this huge refund that goes out the door that the taxpayer is clearly not entitled to, but they don't know that," said Caroline Chen, assistant clinical professor of law and director of the Low-Income Taxpayer Clinic at Santa Clara University. "They find out later, after the money, of course, is spent."

The cumbersome tax code, insufficient regulations and under- resourced enforcement agencies have helped create a breeding ground for tax preparer fraud, experts said. Each year, illegally practicing tax preparers strike, leaving their frequent victims, low- income and immigrant taxpayers, in financial ruin.

"There's a lot of people who prepare tax returns who are not qualified," said Special Agent Arlette Lee of the IRS Criminal Investigations for Northern California. "Tax-return preparers may be doing this, and the taxpayer has no idea."

The fraud happens in a few different ways. In some cases, the preparer lies on the tax return, fabricating deductions such as charitable contributions, property taxes and business expenses. The taxpayer often doesn't know the preparer is lying on the return or is tricked. …