Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Feb 8, 2013

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“Free tax returns for everyone!” “More money for you, guaranteed!”

From January to April, consumers are inundated with advertisements promoting free and reduced cost tax preparation. But what if a scammer or an ill-trained preparer ruined your chances of getting your return back?

Failing to properly file a tax return can lead to income tax fraud.

Income tax fraud happens across the country each year. Return Preparer Fraud usually occurs when income tax returns are filed by preparers who claim inflated personal and business expenses, fake deductions and excessive exemptions on returns.

Aryeh Gorestky, distinguished researcher at ESET, an IT security company, said that tax season is a strong time for online fraud scams.

“The months and weeks leading up to the April 15 filing date are typically hunting season for online tax-related scams,” he said.

Although all taxpayers should be wary of scammers, those with complicated tax returns, such as homeowners, have the most to worry about. As tax returns become more difficult, the likelihood for error grows.

The Dangerous Free Return

Mark Steber, Chief Tax Officer for Jackson Hewitt Tax Service, said homeowners should be wary when enlisting another person to file their taxes.

Steber said consumers should be wary of “free” tax return services.

“Some of those might be alright but most of those should steer clear of,” he said. “You will be there holding the bag when the IRS comes after you.”

Stephen Cobb, security evangelist at ESET, agrees with Steber that consumers should be wary of free tax claims.

“I am dubious of free tax filing services because nothing is really free, so you have to wonder what angle a company is playing to offer you a free service,” he said.

Cobb said the only way to ensure that a tax service is truly free is to file personally via the IRS website.

Shauna Wekherlien, CPA and owner of Tax Goddess Business Services said free tax filings are consulting services and not a full-fledged tax return service, which means the preparer will not sign the tax return.

“If they prepare it, they should sign it, and you should expect to pay,” she said.

Steber agrees with Wekherlien.

He said one thing to watch for when another professional or non-professional prepares your taxes is whether or not they provide a social security number, or Employer Identification Number (EIN) and a signature. Without these two items, all of the responsibility for the forms is given to the filer.

When a professional files a tax return on behalf of someone else, they will provide these two items to verify that if there are errors, they will be contacted. The consumer should still review and understand the forms, but it adds another level of security for the tax filer.

Steber said a failure to provide documentation is the “first warning sign.”

“If they don’t sign it, I would question it,” he said.

Effects of Income Tax Fraud

According to the IRS, for the upcoming tax season, over 3,000 IRS employees were tasked to work on identity theft-related issues. In 2012 alone, the IRS protected $20 billion of fraudulent refunds, an increase from $14 billion in 2011.

Gorestky told that while the IRS’s efforts are not as visible as other federal enforcement agencies, the Criminal Investigation Division, in conjunction with the Financial Crimes Enforcement Network (FinCEN) does an “excellent job of combating tax fraud.”

Cobb said that even with some of the best anti-fraud experts at their disposal, income tax fraud still occurs frequently.

“Make no mistake, some people who commit tax identity fraud are arrested and convicted, but this is nowhere near enough to deter an army of scammers looking for their slice of the billions of dollars the IRS pays out in fraudulent refunds,” Cobb said.

He said that consumers subjected to tax fraud could face a battle with the IRS. The IRS could ask for money that was paid to a scam artist to be paid back to the Service.

And efforts to resolve fraud do not happen quickly. According to Cobb and the Wall Street Journal, the IRS currently has a backlog of 650,000 tax identity fraud cases.

Consumers can find themselves unable to continue their financial freedom in the same way. Cobb said tax fraud could inhibit a consumer’s ability to get a loan, such as a mortgage loan or auto loan.

Ways to Prevent Fraud

Wekherlien said taxpayers should be concerned if the selected preparer says one of the following statements:

  • “They won’t catch it,”
  • “The IRS doesn’t look at this category,”
  • “You can deduct more than you paid,”
  • “I do this all the time,” and
  • “You don’t need records, it’s ok.”

Wekherlien said if a tax preparer recites any of the above statements, a consumer should be wary and check with the Better Business Bureau (BBB) and the State Board of Accountancy to see if there have been any reported fraud issues.

Cobb said the best way to guarantee tax returns are filed fraud-free is to use a reputable preparer, preferably one referred by a friend that used the preparer in the past.

It is best to use a professional that has been in the business for several years. The IRS typically audits on tax returns filed in the past two to three years, so it can take years to determine if a preparer is filing properly.

A typical cost for a professional to file one’s taxes can be a couple hundred dollars, ranging between $200 to $300. Steber said Jackson Hewitt’s tax services can range depending on the complexity of the return, number of filings, whether or not the return is itemized and the geographical location.

Steber said a normal tax return should not cost a consumer a thousand dollars, as would be the cost for a big firm or a CPA. He said the only time to enlist a CPA is if the IRS issues a notice or an audit. Although filing with a professional is advised for complex cases, even those taxpayers are subject to scammers.

Cobb said there is no exact way to guarantee that a tax filer will not become a tax-identity theft victim.

“There is not a lot that consumers can do right now to prevent tax identity fraud because there are gaping holes in the way the IRS processes electronic tax returns, refunds, and payments,” he said. “Until these holes are closed, criminals will continue to regard tax identity fraud as an appealing activity with high reward and low risk.”

Cobb suggests that consumers do the following to reduce the chances of tax identity fraud:

  • Consumers should order their IRS transcript to see an official record of tax payments and refunds.
  • Taxpayers should file their return early which limits the time gap for fraud to occur.
  • Consumers should monitor all bank accounts at least once a week to check for any unauthorized charges or deposits.
  • Banks can put an ACH debit block on checking accounts. This will prevent scammers from taking money in this form, but it could prevent legitimate users from utilizing online or phone payments.
  • Consumers should keep all information such as social security numbers and bank account numbers secure at all times. If an online form or service seems questionable, do not provide these items.

In the end, the taxpayer is ultimately responsible for the information provided on a tax return as well as keeping their identity and banking information secure.