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Hi, I’m the National Taxpayer Advocate and I’d like to discuss today, an issue I’ve identified as a
Most Serious Problem in my Annual Report to Congress.
Namely, the victim assistance by the IRS to taxpayers who’ve experienced return preparer fraud.
Now, over 59 percent of individual taxpayers and 71 percent of sole proprietors and partnerships
seek the assistance of commercial return preparers to prepare their tax returns each year.
Now the selection of a return preparer is the key to getting an accurate return.
There are attorneys, certified public accountants, enrolled agents – all of whom have to take certain
testing and meet certain standards to practice before the IRS.
Until recently, anyone could prepare an income tax return.
Now after my recommendation in 2002, the IRS, finally,
these past couple of years instituted regulation of return preparers.
And so, this will make a big improvement for taxpayers to be able to select return preparers,
because return preparers who aren’t attorneys, certified public accountants or enrolled agents
will have to take an exam and meet continuing education requirements going forward to prepare returns.
But even with this regulation, there will be some tax return preparers who will commit fraud against their taxpayers, their clients.
And in the Taxpayer Advocate Service, the organization that I head which is created
by Congress to help taxpayers solve their problems, we have seen certain cases over the
years that meet a certain kind of fact pattern where preparers are actually committing fraud
and taking the taxpayers refunds as part of the return preparation process.
And this fact pattern follows four different approaches.
One is what we call unauthorized filing.
The taxpayer goes in, has an interview with the preparer, decides not to go with that
particular preparer and then finds out later that the preparer has filed a return on their behalf,
completely unauthorized and pocketed the refund.
Another approach is where the taxpayer signs off on a return by the preparer,
gets even a copy of what they think is being filed as their return and the preparer alters it later
either increasing dependency exemptions or maybe even withholding amounts;
pockets the difference between the refund that the taxpayer expected and the refund
that shows up on the return that is ultimately filed – has it redirected to their account.
It could be in some instances that the preparer just changes the routing number of where the
refund is to be direct deposited and the taxpayer never gets the refund that they were expecting.
Now since 2000 - twelve years ago, IRS has received four opinions from its Chief Counsel,
saying that the IRS must back out from the taxpayer’s account the invalid return prepared by
the preparer and accept the taxpayer’s valid return thus eliminating the taxpayer’s liability for any improper refunds sent to the preparer.
The IRS attorneys also said that there was no legal bar to reissuing the taxpayer’s legitimate
refund where the preparer had pocketed the difference.
Yet it was not until June 2012, twelve years lapsed after the first Counsel opinion,
and after I ordered the IRS under a Taxpayer Advocate Directive and under four Taxpayer Assistance orders to develop procedures,
did the IRS actually agree to help taxpayer victims of return preparer fraud and issue guidance.
But even now that guidance is incomplete.
If a victim of preparer fraud is due a refund and the preparer misappropriates that refund by
having the refund electronically deposited into an account controlled by the preparer,
the IRS says it’s a civil matter between the taxpayer and the preparer – the thief.
Now, this is so even though if the taxpayer had asked for a paper check and that was stolen,
the IRS could replace that paper check.
There is a check forgery insurance fund that provides a source of funds for the taxpayer’s payment to be made out of.
But legal authority to issue that replacement check exists whether it’s a paper check or an electronic deposit.
This is, of course, nuts.
The tax code is so complex that three out of five individual taxpayers use preparers.
The IRS is pushing taxpayers to electronically file and use direct deposit to save the government money,
and yet the IRS won’t help victims of preparer fraud when they use direct deposit.
But they will help taxpayers if they use the archaic method of getting paper refund checks.
In fiscal year 2012, my organization, the Taxpayer Advocate Service,
issued 58 Taxpayer Assistance Orders to the IRS on preparer fraud cases seeking relief for these taxpayers.
Today, I have 26 of these Taxpayer Assistance Orders elevated to me, personally,
and I will be elevating them to the Acting Commissioner.
On average, these cases have been in the Taxpayer Advocate Service for 11 months.
And of these 26 Taxpayer Assistance Orders, the average adjusted gross income for these taxpayers is $32,000.00,
and the average refund these taxpayers are expecting is 28 percent;
more than a quarter of their adjusted gross income.
There is real economic harm happening to these taxpayers.
And the IRS has had 12 years to get this right and still hasn’t got it.
I will continue to advocate for relief for these taxpayers even as we seek an amendment to the
check forgery insurance fund to create a dedicated funding source for stolen electronic deposits.
Finally, these preparers prey on the most vulnerable taxpayers;
the elderly; the low income; taxpayers who have limited English proficiency.
For years, I have recommended that the IRS do a formal marketing campaign to these taxpayer
populations about how to select a preparer, and remind the taxpayers that it is their legal right to
get a copy of their tax return that is signed by their commercial preparer with that commercial
preparer’s identification number.
At the very least, a copy of the return will help prove your case if the preparer commits fraud.
The IRS’s failure to aggressively educate taxpayers on these points facilitates the very fraud we should be stopping.
You can read the whole sorry story about the IRS’s refusal to provide victim assistance in our annual report.
Despite the IRS’s statements to contrary, there is no difficult policy issue here.
A fraud has been committed against the taxpayer similar to when someone steals a paper refund check.
And the IRS has the legal authority to make the taxpayer whole and seek restitution from the preparer.
This is a simple, basic issue of taxpayer rights, justice and fairness for taxpayers who are
simply trying to meet their obligations under the Internal Revenue Code.
You can read our Most Serious Problem and following our specific recommendations for mitigating this problem.
Thank you.
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