Americans can count on it every spring.
Taxes, just like death, come to everyone. And regardless of gender, race or income, citizens will be scrambling to file their taxes with the government next Monday, April 18th
Increasing numbers of taxpayers are filing returns online, often using commercial software programs. But many, for whom the tax codes remain a mystery, will be turning to professionals to prepare and file their personal income taxes.
And this, says the Internal Revenue Service (IRS), can sometimes push unwitting Americans into the clutches of fraudsters and scam artists.
Since ignorance of the law is no defense, that means an otherwise honest taxpayer can be held responsible for violating the law—even if the offense occurred without his or her knowledge.
Nevertheless, tax cases are rarely prosecuted, says David Burnham, co-director of Transactional Records Access Clearinghouse (TRAC), a national data and record clearing house based at Syracuse University.
According to TRAC, an examination of the latest available Justice Department data shows that during FY 2010 the government reported 1,186 new convictions for tax fraud. The Justice Department and IRS do not agree with TRAC's analysis. In 2010, the last full fiscal year data was available for, the IRS reported that they initiated 4,706 investigations and garnered 2,814 convictions.
Whichever figure is correct, the comparatively small number of prosecutions is not necessarily welcome news to the rest of us.
Millions of taxpayers either unwittingly or wittingly may be fraudulently avoiding their tax obligations—and at a time when Washington is locked in battle over how to reduce our spiraling deficit, every dollar counts.
The IRS employs 2,700 special agents who investigate tax, money laundering and Bank Secrecy Act laws. They work in conjunction with the Department of Justice's Tax Division and US Attorney's offices around the country.
When the IRS finds a case it believes should be criminally prosecuted, the case is referred to the Department of Justice (DOJ) which can either try or decline to prosecute, Charles Miller, spokesperson for the tax division, told The Crime Report. The DOJ tax division alone employs 400 lawyers who work on tax prosecutions in conjunction with the US Attorney offices around the country.
One reason for the discrepancy between TRAC's analysis and the government's is that the DOJ has a different approach for typical cases of tax fraud, says spokesperson Miller.
Instead of prosecuting each fraudulent tax filer, the DOJ pursues tax preparers who are filing fraudulent claims. Most of these tax preparers are shut down by injunctions instead of going through a long and drawn out prosecution.
“Shutting them [fraudulent tax preparers] down it is the fastest way to go,” said Miller.
The DOJ doesn't keep figures on injunctions, he added. But the vast majority of fraudulent tax cases are handled in this matter.
And this is where the average citizen taxpayer gets caught in the criminal web. A requirement of most injunctions is that the preparers have to hand over their client lists, which has the names of every person for whom they filed a return—and that puts unsuspecting clients in the government's sights.
But how can average tax filers know what to look for to protect themselves from getting caught in this web? With over 60 percent of Americans using paid tax preparers, not CPAs or lawyers, to file their taxes, more people are at risk.
“Obviously nothing is foolproof,” said Ed Karl, American Institute of Certified Public Accountant's (AICPA) vice president of taxation, and a certified public accountant for 34 years, “But there are a number of steps people can take to protect themselves.”
Karl recommends that taxpayers keep a four-point checklist before choosing a tax preparer:
1. Get reference from someone you know and trust, preferably a family member or friend, who may have used a tax professional, for a couple of years.
2. Ask the preparer for his or her professional affiliations or associations.
3. Check with the local better business bureau to see if the preparer has been the target of an unusual number of complaints or legal actions.
4. Make an appointment for a frank sitdown with the preparer before making a final choice, and question him or her closer about their background, especially their training, experience and qualifications.
Karl also cautioned that filers should be wary of the promise of large refunds or a request for contingency fees.
Currently, there are no government or licensing requirements set for tax preparers. Only CPAs and lawyers have licensing and testing requirements Although the IRS has recently set up a mandatory registration system, any private individual can hang out a 'tax preparers' sign or advertise services.
Most important of all, taxpayers should educate themselves about basic tax laws and responsibilities. Only knowledge can protect citizens from a huge and unexpected tax bill due to someone else's criminal actions.
The moral: the errors on your return are your responsibility—no matter who prepares it.
Cara Tabachnick is managing editor, news and content, of The Crime Report.