RETURN PREPARER FRAUD: The IRS Still Refuses to Issue

Text Preview:
Most Serious                     Legislative                       Most Litigated
                                                                                                      Case Advocacy                         Appendices
 Problems                     Recommendations                         Issues




   
 MSP RETURN                 PREPARER FRAUD: The IRS Still Refuses to Issue
 #8                 Refunds to Victims of Return Preparer Misconduct Despite
                    Ample Guidance Allowing the Payment of Such Refunds


            RESPONSIBLE OFFICIAL
                    John Koskinen, Commissioner of Internal Revenue


            DEFINITION OF PROBLEM
                    While most tax return preparers treat their clients with honesty and integrity, some unscrupulous prepar-
                    ers prey on unsuspecting taxpayers by altering return information without their clients' knowledge or
                    divert refunds for their personal benefit.  This type of fraud creates significant challenges for the IRS,
                    harms innocent taxpayers, and undermines trust in our tax system.

                    In 2012, the IRS developed interim guidance1 that addresses in a taxpayer-favorable manner the type of
                    fraud where the preparer inflates the refund without the taxpayer's knowledge, provides the taxpayer with
                    the accurate refund amount, and pockets the difference.2 Yet in cases where the preparer alters return
                    information without the taxpayer's consent and directs the entire refund to an account under his or her
                    control, the IRS has refused to make these victims whole -- namely, by issuing the refunds claimed on
                    their legitimate returns.

                    On October 17, 2012, the National Taxpayer Advocate issued a proposed Taxpayer Advocate Directive
                    (TAD) directing the Commissioner of Wage and Investment (W&I) to, among other things, develop pro-
                    cedures to issue refunds to victims of return preparer fraud who are due a refund after they file a correct
                    original return. After receiving an unsatisfactory response, the National Taxpayer Advocate included re-
                    turn preparer fraud as a most serious problem faced by taxpayers in her 2012 Annual Report to Congress.

                    The National Taxpayer Advocate has elevated 25 preparer fraud Taxpayer Assistance Orders (TAOs) to
                    the Acting Commissioner. These taxpayers have been waiting an average of more than two years to receive
                    their refunds. Some of these victims have been waiting for refunds ever since they filed 2008 tax returns.3
                    These victims are typically low income taxpayers, with a median adjusted gross income of $17,548; the
                    median refund amount is $2,511. In at least 14 cases, the taxpayer reported the refund fraud to the local
                    police.




 1    See Director, Accounts Management, Interim Guidance on Return Preparer Misconduct (For Memphis Accounts Management ONLY), WI-21-0812-
      02 (Sept. 6, 2012), superseded by Director, Accounts Management, Interim Guidance on Return Preparer Misconduct (For Memphis Accounts
      Management ONLY), WI-21-0813-02 (Aug. 5, 2013).
 2    In such cases, the taxpayer has a copy of the legitimate return, receives the refund he or she was expecting, and has no reason to suspect fraud.
      Only when the IRS ultimately discovers the taxpayer's return is incorrect and attempts to recover the excess refund through levies, liens, and other
      enforcement actions does the taxpayer learn of the preparer's fraud.
 3    See, e.g., Taxpayer Advocate Management Information System (TAMIS) case numbers 4757753, 5269873, and 5361465.




 94                                                                                            Most Serious Problems -- Return Preparer Fraud
                                                                Most Litigated                      Legislative                                 Most Serious
Appendices                    Case Advocacy
                                                                   Issues                        Recommendations                                 Problems




           ANALYSIS OF PROBLEM

                  Background
                  The IRS has developed interim guidance and procedures to address situations where a victim of return
                  preparer fraud has received the full refund that he or she expected.4 However, the IRS response is insuf-
                  ficient in cases where the victim of the preparer has not received the full refund to which he or she is
                  entitled because the preparer has stolen it. The guidance falls short of instructing IRS employees to issue
                  refunds to victims of preparer fraud, which from the victim's perspective is likely the most important
                  aspect of the case. Instead, the procedures instruct employees to suspend action on such cases pending
                  further guidance.

                  TAS began keeping track of preparer fraud TAOs in fiscal year 2012; there are 107 open preparer fraud
                  TAOs within TAS as of December 16, 2013.5 Of these, the National Taxpayer Advocate has elevated
                  25 preparer fraud TAOs involving refund theft to the Acting Commissioner of Internal Revenue, with
                  another 59 in the process of being elevated to that level.



                                                                Taxpayer Assistance Orders*




                                                                                                                   National Taxpayer
                                                          59 preparer fraud cases involving refund theft         Advocate has elevated
                                                        in process of being elevated to IRS Commissioner        25 preparer fraud TAOs
                                                                                                                involving refund theft to
                                                                                                                 the IRS Commissioner




                                                                107 open preparer fraud TAOs in TAS

                                                                                                           * All data as of December 16, 2013




                  Some of the victims who have come to TAS for help have been waiting for refunds ever since they filed
                  2008 tax returns.6 In the 25 preparer fraud TAOs elevated to the Acting Commissioner, the taxpayers
                  have been waiting an average of more than two years to receive their refunds! These victims are typically low
                  income taxpayers, with a median adjusted gross income of $17,548. In at least 14 cases, the taxpayer
                  reported the refund fraud to the local police, resulting in at least five arrests.




 4   See Director, Accounts Management, Interim Guidance on Return Preparer Misconduct (For Memphis Accounts Management ONLY), WI-21-0813-02
     (Aug. 5, 2013); Director, Collection Policy, Interim Guidance Memorandum on Return Preparer Fraud or Misconduct, SBSE-05-0613-0034 (June 3,
     2013).
 5   See email from Director, TAS Technical Analysis & Guidance (Dec. 19, 2013).
 6   See, e.g., TAMIS case numbers 4757753, 5269873, and 5361465.




 Taxpayer Advocate Service -- 2013 Annual Report to Congress -- Volume One                                                                             95
Most Serious                     Legislative                        Most Litigated
                                                                                                        Case Advocacy                         Appendices
 Problems                     Recommendations                          Issues




                    FIGURE 1.8.1, Statistical Snapshot of the 25 Preparer Fraud TAOs elevated to the Acting
                    Commissioner
                                   Median AGI                                 Median Refund                           Average Days Waiting         7


                                     $17,548                                        $2,511                                         745



                    On December 20, 2013, the Deputy Commissioner for Services and Enforcement responded to the 25
                    TAOs that had been elevated to the Acting Commissioner level. For victims who did not receive the full
                    amount of refund he or she was expecting, the IRS will not issue any further refunds. The rationale given
                    was that it would be difficult for the IRS to detect collusion between the preparer and the victim.8

                    The National Taxpayer Advocate is not nave and recognizes that collusion is a legitimate area of concern.
                    However, there are ways to deal with that possibility without harming a whole class of taxpayers. Some
                    taxpayers that have come to TAS have filed police reports (taxpayers did so in 14 of the 25 TAO cases)
                    and even assisted law enforcement personnel in having the preparer arrested for fraud. In such cases, any
                    suspicion of collusion should be allayed. Instead of trying to develop workable documentation require-
                    ments to address this concern of collusion, the IRS made a blanket decision to deny payment to all
                    victims of preparer fraud who have not received the full amount of their refund (unless they can show that
                    the return filed was completely unauthorized; the IRS may try to resolve those cases using identity theft
                    procedures).9

                    It Is Permissible for the IRS to Reissue Refunds to Victims of Preparer Fraud, When the Return
                    Preparer Has Absconded with the First Refund.
                    Since 2000, the IRS has received the benefit of several Chief Counsel opinions that address preparer
                    fraud.10 These opinions, when read together, authorize the IRS to:
                           1.Deem the first, falsified return a "nullity;"
                           2.Accept and process the second, true return submitted by the taxpayer after discovering the
                             preparer fraud; and
                           3.Issue any refund due to the taxpayer under the second, true return (including any amounts previ-
                             ously paid to and stolen by the preparer), plus interest.

                    Particularly insightful is the Chief Counsel position in Field Service Advice (FSA) 200038005 from June
                    6, 2000. While FSA are not precedential, they do offer a glimpse into how the IRS may analyze a similar
                    situation. This FSA involved a taxpayer who visited a Volunteer Income Tax Assistance (VITA) site
                    staffed by military volunteers to have her return prepared electronically. The taxpayer received a copy of
                    the return she authorized and was expecting a refund to be direct deposited. When she did not receive the


 7    Measured from the date the taxpayer came to TAS for assistance through December 2013.
 8    See Deputy Commissioner for Services and Enforcement response to the National Taxpayer Advocate re: Return Preparer Fraud TAOs (Dec. 20,
      2013) (stating "It would be extremely difficult to ensure that the taxpayer and the return preparer are not in collusion in order to obtain an addi-
      tional refund. If collusion is not present in the current cases, establishing a process whereby IRS issues a second refund could certainly create
      an incentive for taxpayers and preparers to abuse in order to obtain additional Federal monies.").
 9    See Deputy Commissioner for Services and Enforcement response to the National Taxpayer Advocate re: Return Preparer Fraud TAOs (Dec. 20,
      2013).
 10 See Field Service Advice 200038005 (June 6, 2000); IRS Office of Chief Counsel Memorandum, Horse's Tax Service, PMTA 2011-13 (May 12,
    2003); IRS Office of Chief Counsel Memorandum, Refunds Improperly Directed to a Preparer, POSTN-145098-08 (Dec. 17, 2008); IRS Office of
    Chief Counsel Memorandum, Tax Return Preparer's Alteration of a Return, PMTA 2011-20 (June 27, 2011).




 96                                                                                             Most Serious Problems -- Return Preparer Fraud
                                                                       Most Litigated                     Legislative                         Most Serious
    Appendices                     Case Advocacy
                                                                          Issues                       Recommendations                         Problems




                        refund at the expected date, she contacted the VITA site, which discovered that someone affiliated with
                        the site altered the taxpayer's return information and directed the refund into another account. The FSA
                        concluded that if the taxpayer can show that the direct deposit was stolen, the IRS may reissue a second
                        refund to the taxpayer since it is clear the taxpayer never received the first one. In other words, there is no
                        legal impediment to the IRS reissuing a refund to make the taxpayer whole in situations of return preparer
                        fraud.

                        An Unauthorized Tax Return Should Not Be Treated as a Legitimate Return of the Taxpayer.
                        In Beard v. Commissioner,11 involving a taxpayer who altered a Form 1040, U.S. Individual Income Tax
                        Return, the Tax Court applied a four-part test to determine whether a document filed with the IRS quali-
                        fies as a "return" for tax purposes. Those requirements are that the document:
                              1.Purport to be a return;
                              2.Be signed under penalties of perjury;
                              3.Contain sufficient data to permit a tax to be calculated; and
                              4.Evince an honest and genuine endeavor to satisfy the requirements of tax law.

                        The IRS Office of Chief Counsel has routinely referred to the Beard analysis in its opinions on preparer
                        fraud as the generally accepted test for determining the validity of a tax return.12

                                                     In a typical preparer fraud case scenario, the preparer alters some information
                                                     on the return after the taxpayer has authorized a prior version. Accordingly, the
                                                     return submitted by the return preparer was not reviewed, authorized, or signed
Return preparer
                                                     by the taxpayer under penalties of perjury. It is not a valid return, as it fails the
misconduct occurs when a                             signature requirement of the Beard test, and should not be treated as a return of
tax preparer alters return                           the taxpayer.
information without their
                                                     Thus, the decision faced by IRS leadership in whether it will pay refunds to vic-
clients' knowledge or
                                                     tims of preparer fraud is largely one of public policy, rather than a legal question.
consent in an attempt to
obtain improperly inflated                           Public Policy Concerns Dictate that the IRS Make Victims of Preparer
refunds, or to divert                                Fraud Whole.
refunds for their personal                           In 2012, the National Taxpayer Advocate has designated the complexity of the
benefit.                                             Internal Revenue Code (IRC) as one of the most serious problems facing taxpay-
                                                     ers.13 The existing code, by our count, has reached nearly four million words and
                                                     imposes unconscionable burden on taxpayers.14 Our analysis of IRS data indicates


     11 82 T.C. 766, 777-78 (1984), aff'd per curiam, 793 F.2d 139 (6th Cir. 1986).
     12 See IRS Office of Chief Counsel Memorandum, Horse's Tax Service, PMTA 2011-13 (May 12, 2003); IRS Office of Chief Counsel Memorandum, Tax
        Return Preparer's Alteration of a Return, PMTA 2011-20 (June 27, 2011). In discussions with IRS Executives, the Office of Chief Counsel recently
        advised that the IRS, as an innocent third party, would not be required to pay out these refunds under agency law. Specifically, the IRS could rely
        on the fraudulent representation of the return preparer (the agent) who filed a return he or she fraudulently altered; thus, any refunds issued by
        the IRS to the return preparer would satisfy the IRS's obligation to pay a refund to the taxpayer (the principal). The Office of Chief Counsel has
        not adopted or advanced this position in any of its opinions pertaining to return preparer fraud. Indeed, this theory contradicts all prior opinions
        on the matter and would result in treating taxpayers who are similarly situated, but for the issuance of a refund, being treated disparately.
     13 See, e.g., National Taxpayer Advocate 2012 Annual Report to Congress 3-23 (Most Serious Problem: The Complexity of the Tax Code).
     14 See Id. at 6.




     Taxpayer Advocate Service -- 2013 Annual Report to Congress -- Volume One                                                                           97
Most Serious                    Legislative                        Most Litigated
                                                                                                     Case Advocacy                         Appendices
 Problems                    Recommendations                          Issues




                    that individuals and businesses spend about 6.1 billion hours a year complying with tax-filing
                    requirements.15

                    Even as tax compliance becomes more complex, the IRS provides fewer resources to help taxpayers file
                    their returns. For example, IRS Taxpayer Assistance Center staff will no longer help customers with re-
                    turn preparation.16 Many taxpayers, particularly low-income ones who are eligible for various refundable
                    credits, feel pressure to hire a preparer to meet their statutorily-mandated tax filing requirement.


                    FIGURE 1.8.2, Taxpayers Claiming Refundable Credits, Claim Amounts, and Preparer
                    Usage: Tax Years 2010 and 201117
                                                                                               Average           Total Claims           Preparer
                                                                         Number of              Claim              (dollars in          Returns
                     Tax Credit                         Tax Year         Taxpayers             (dollars)          thousands)          (percentage)
                     EITC                                  2011           27,362,193              $2,270         $62,119,975                  59.3%
                     Additional child tax credit           2011           20,616,435              $1,347         $27,771,740                  65.0%
                     First-time home buyer credit          2010               373,880             $6,893           $2,577,155                 53.8%
                     Adoption credit                       2011                55,794            $13,474             $760,365                 60.1%
                     Making work pay credit                2010         106,381,764                  $514        $54,784,234                  53.6%
                     American opportunity tax
                                                           2011           12,525,776                 $899        $11,266,488                  55.9%
                     credit


                    Overall, approximately 60 percent of taxpayers will use tax professionals to help them navigate the maze
                    of the tax code and prepare their 2013 tax returns.18




                                                   Taxpayer Use of Tax Professionals for Return Preparation




                                      60% of taxpayers will use tax professionals
                                      to help them prepare their 2013 tax returns




 15 See Id. at 5.
 16 See Id. at 302 (Most Serious Problem: The IRS Lacks a Servicewide Strategy that Identifies Effective and Efficient Means of Delivering Face-to-
    Face Taxpayer Services); IRS, W&I Business Performance Review (Nov. 20, 2013); IRS, Wage & Investment Division, Response to TAS information
    request (email dated Dec. 20, 2013). The IRS will refer taxpayers who visit Taxpayer Assistance Centers for tax preparation to the nearest volun-
    teer site for tax return preparation.
 17 IRS Compliance Data Warehouse, Individual Returns Transaction File and Individual Master File, tax year 2010 and 2011 (through Mar. 2013).
 18 See IRS, IR-2013-33, IRS Releases the Dirty Dozen Tax Scams for 2013, available at http://www.irs.gov/uac/Newsroom/IRS-Releases-the-
    Dirty-Dozen-Tax-Scams-for-2013; IRS, IR-2008-2, Treasury and IRS Give Taxpayers Greater Control over Information Held by Tax Preparers, Propose
    Marketing Restrictions on RALs, available at http://www.irs.gov/uac/Treasury-and-IRS-Give-Taxpayers-Greater-Control-over-Information-Held-by-Tax-
    Preparers;-Propose-Marketing-Restrictions-on-RALs.




 98                                                                                           Most Serious Problems -- Return Preparer Fraud
Download Link:
Share Link: Forum Link:

More on Computer & Internet

  • Picture: Haptic Communication between Humans and Robots

    Haptic Communication between Humans and Robots

    File Size: 752.03 KB, Pages: 12, Views: 256 views

    Haptic Communication between Humans and Robots Takahiro Miyashita1 , Taichi Tajika12 , Hiroshi Ishiguro12 , Kiyoshi Kogure1 , and Norihiro Hagita1 1 Intelligent Robotics and Communication Labs., ATR, Kyoto, JAPAN {miyasita,kogure,hagita}@atr.jp 2 Dept. of Adaptive Machine Systems, Osaka University, Osaka, JAPAN {Taichi.TAJIKA,ishiguro}@ams.eng.osaka-u.ac.jp Summary. This paper …
  • Picture: 1 Spectrum Lab User's Manual - QSL.net

    1 Spectrum Lab User’s Manual – QSL.net

    File Size: 1,551.67 KB, Pages: 138, Views: 513 views

    1 Spectrum Lab User's Manual This ,,document" is just a collection of all HTML files from Spectrum Lab's built-in help system. They were simply combined in a master document in OpenOffice, by means of 'including' the html pages as sub-documents. Unfortunately, the links between these …
  • Picture: South-Western Federal Taxation Comprehensive Volume

    South-Western Federal Taxation Comprehensive Volume

    File Size: 524.04 KB, Pages: 16, Views: 454 views

    Study Guide South-Western Federal Taxation Comprehensive Volume 2009 EDITION Eugene Willis, Ph.D., CPA University of Illinois, Urbana-Champaign William H. Hoffman, Jr., J.D., Ph.D., CPA University of Houston David M. Maloney, Ph.D., CPA University of Virginia William A. Raabe, Ph.D., CPA The Ohio State University Prepared …
  • Picture: Peachtree by Sage: A True Business Management Solution for

    Peachtree by Sage: A True Business Management Solution for

    File Size: 0.00 KB, Pages: 11, Views: 173 views

    Peachtree by Sage: A True Business Management Solution for Serious Small Business Owners By K2 Enterprises Table of Contents Peachtree by Sage Overview . . . . . . . . . . . . . . . . . . . . . . …
  • Picture: CERTIFIED ADVANCED BUSINESS ANALYST (CABA)

    CERTIFIED ADVANCED BUSINESS ANALYST (CABA)

    File Size: 933.78 KB, Pages: 14, Views: 309 views

    CERTIFIED ADVANCED BUSINESS ANALYST (CABA) STUDY GUIDE Sponsored by: and TABLE OF CONTENTS: Please use this guide to assist in preparation for your Certified Advanced Business Analyst (CABA) Certification exam. The contents of this study guide are as follows: I. An Overview of the Business …

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>