Ask The Taxgirl: When Tax Preparers Go Bad

Taxpayer asks:

Hi tax girl!

So I’ve heard a pretty believable rumor that the tax preparer I’ve used for four years has been federally indicted for tax fraud. I’m not sure if it was her own tax return or the people she worked with, though I do know of a few people who used her that have been audited and ended up owing.

I’m asking three things:

1. Will all of her clients (past and present) be audited? Basically, does this automatically mean I should be looking for a letter from the IRS in the near future?
2. Three of the four years I used her, she was working for a nationally-reputable tax preparation company and each year I signed up for their preparer assurance policy (insuring mistakes/discrepancies up to a certain dollar amount). Will/should this be upheld in these circumstances?
3. In hindsight, I have reasonable suspicion about some deductions that were claimed on my returns. What is my best recourse here? Should I consult the tax preparation company preemptively regarding my suspicions, or just wait for the letter in the mail to arrive? Address next tax season with my new preparer?

Any advice/insight you could give would be greatly appreciated!

– A concerned taxpayer

Taxgirl says:

I could see where that might give you some cause for concern. So much of this is going to rely on the actual facts and circumstances of this case so be prepared for a lot of “it depends”…

1. If, in fact, your tax preparer is indicted for tax fraud and it’s restricted to her own tax return, I can’t imagine that the feds would target her client returns. Those are totally separate issues.

   If your tax preparer is indicted for tax fraud with respect to returns that she prepared, the scale of any subsequent audits would depend on the nature of her fraud. If it were a fake refund scheme or a 1099-OID scheme, for example, the IRS might flag returns that involve those specific matters. However, a sweeping audit of her client returns would seem extraordinary without an understanding of the number of returns and the nature of the fraud. It’s also important to keep in mind that the Criminal Investigative Division of the IRS is separate from the audit division though there’s no question that they would share information where appropriate.

2. With respect to any kind of insurance or audit protection that you might have signed up for, the answer would depend on the specific contract. If I had to guess, fraud would not be covered under the policy and there are probably exceptions that apply when their representatives act outside of the scope of their employment. But read the fine print: that’s what it’s there for.
3. So, all of that said, here’s where I can give you an answer that doesn’t involve the words “it depends.” If you’re concerned about your previously filed returns, have a reputable tax professional review the returns and give you some feedback. If you already have doubts about the veracity of the returns, it’s best to nip it in the bud now. Absolutely be proactive: it’s rarely a good idea to wait for the IRS to come to you.

Good luck!

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Kelly Phillips Erb

Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.

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