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Crooked tax preparers lure consumers with promise of big refund

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Posted at 2:28 PM, Mar 30, 2015
and last updated 2015-03-30 15:06:14-04

Yenis Gutierrez paid Universal Tax Service to prepare her returns after a friend told her the company knew how to calculate big refunds. And sure enough, Gutierrez was impressed. After working the numbers for 2009, the Lanham, Maryland company informed her she was owed about $4,000 -- far more than she’d ever received before. And when she hired Universal the next year too, again paying $300 for the service, the calculations were about the same. Delighted, she signed the returns each time without reading them.

 “When you get that much, you don’t question it because it felt good to have the money,” said Gutierrez, a 35-year-old Salvadoran immigrant who came to the United States 15 years ago and settled in the Washington suburb of Alexandria, Va.

By 2012, however, the Internal Revenue Service was asking Gutierrez for proof of thousands of dollars in deductions claimed on those returns, and she realized she was in trouble. Gutierrez, who doesn’t speak English and talked to Scripps through an interpreter, said she wasn’t aware that Universal had reported cash contributions to her church and the Salvation Army.

“I called the tax preparer and they told me that they were going to give me proof so I could show the IRS,” she says. At that point, says Gutierrez, she went straight to the tax agency. “I felt like what was going on wasn’t legal.”

Pregnant and jobless at the time, she suddenly faced paying several thousand in federal and state back taxes and penalties.  She blames the mess on the tax preparer, and thinks the firm should have been responsible for paying.

Shady tax preparers flourish this time of year, operating out of pawn shops, used car lots and strip malls as they build their businesses on promises of big refunds, according to taxpayer advocates.  By the time the IRS catches on, if it does, the businesses may be long gone. They leave surprised and unsuspecting clients to face the feds and pay up sometimes sizeable back taxes and fines.

Federal prosecutors ultimately filed a civil lawsuit accusing Universal of overseeing the “wide-scale preparation of fraudulent tax returns.”

The Justice Department and company executive Tonya Hubbard closed the case by agreeing to a permanent injunction barring Hubbard from opening another tax preparation business. She now manages a consulting company out of the same office, according to her Linkedin Profile.  She did not respond to several interview requests left by phone with office staffers and also sent by email.

Experts trace the rise of these businesses to the release of tax preparation software like TurboTax. Such software has transformed a profession that once required in-depth knowledge of labyrinthine tax rules into one suddenly accessible to nearly anyone who can turn on a computer.  Meantime, low income families have increasingly turned to paid preparers to take advantage of complex but beneficial tax breaks, making them prime targets for scam artists.

The scope of the problem isn’t clear, National Taxpayer Advocate Nina Olson told Congress last spring. Other common abuses include unnecessary, and sometimes hidden, filing fees, and cash-advances with steep costs. Many of the preparers are untrained or ignorant about tax rules, according to consumer watchdogs who want more baseline training, mandatory registration and transparency in pricing.

Olson, the IRS and consumer advocacy groups have long argued for national professional standards for tax preparers. In 2012, Olson points out, 56 percent of individual taxpayers paid someone to complete their taxes -- and more than half of those, 42 million, were done by unregulated professionals. Only four states – California, Maryland, New York and Oregon – require training.

“Without meaningful oversight, taxpayers remain vulnerable to incompetent and unscrupulous preparers,” Olson testified last spring.

Robin McKinney has seen that firsthand in Maryland. In 2005 she established the Maryland CASH Campaign, which partners with other groups around the state to prepare more than 18,000 tax returns annually for low-income families.

McKinney said shadow preparers have developed a predatory culture in which they descend on low income and immigrant communities and charge $400 or $500 for simple tax preparation – much more than the $273 cost reported by the National Society of Accountants. The inflated prices often include fees not charged by legitimate preparers: refund anticipation checks, “electronic filing” fees, transmission fees and document storage fees.

“They say, ‘I’m going to load it up with fees on the return, and you’re not going to understand it,” she said. “They thrive on the lack of transparency.”

As fringe preparers have prospered, the IRS and U.S. Department of Justice have taken notice, investigating cases from Detroit to Denver, Buffalo to Baltimore. Since 2003, criminal investigations annually have increased from 229 to 305, while the number of criminals sentenced has nearly quadrupled, IRS data show.

Some fringe preparers promote themselves with flashy TV commercials splashed during daytime soaps, leaflets tucked into windshield wipers and life-size balloons positioned outside strip malls.

Consumer watchdog groups and the Government Accountability Office have repeatedly documented preparers who intentionally under-report income or fabricate contributions. In 2008, for example, the IRS secretly surveyed  28 tax preparers and found that 17 made errors on the tax returns.

Of those, six firms produced returns with misstatements and omissions so severe that the Treasury Inspector General for Tax Administration considered them to have been “willful or reckless.”

McKinney says that consumers should keep a closer eye on their preparers, not only to ensure their returns are accurate, but also that they aren’t being gouged. She also advises getting a rundown of all service costs up front -- a concern that often gets overlooked.

“What other service do you have where you have no idea how much you paid for it?” she said. “That’s crazy.”

Universal Tax Service, the company that Gutierrez hired, operated from the first floor of a modest three story brick building and boasted of completing more than 2,500 returns a year, according to court records. It employed teams of canvassers to hand out flyers at malls, employed Spanish speakers, and advertised through direct mail and radio.

But, to Gutierrez, it was her friend’s story about getting big refunds that sold her.

“That’s what got my attention,” she said. “When I got to the company, they said it was legal and that the person in charge worked for the IRS.”

She says she spent her approximately $8,000 refund windfall on medical care for her mother, who was undergoing cancer treatment in El Salvador.

When the IRS began questioning her returns, she contacted Universal for advice and says she was told not to worry. She was too poor to be audited, they told her. When Gutierrez went to the IRS, she said the agency had no interest in prosecuting her, but they insisted she make good on her taxes and pay accumulated fines on top of that.

Court records of the Hubbard case say Gutierrez was assessed more than $4,000 in tax, penalties and interest. Gutierrez said she also paid about $1,500 in back state taxes and fines to Virginia.

She borrowed the money from her brother, she says. Now employed by a demolition company, Gutierrez says she is still paying off that loan.

To better protect taxpayers, then IRS Commissioner Douglas Shulman in 2009 spearheaded the development of minimum competency standards and the agency launched an ambitious plan to regulate paid tax preparers. The plan included compulsory registration, 15 hours of continuing education and a competency test.

Testifying before Congress in 2012, Shulman said  rules would “ensure a basic level of competency” and allow the agency to focus on unscrupulous tax preparers.

But the plan was mothballed last year after an appeals judge ruled that the agency had no regulatory authority.

Olson and current IRS Commissioner John Koskinen now want Congress to pass legislation giving the agency powers to develop national standards, similar to those in the four states that already require training. But Congress, which has been lobbied since 2002 to pass legislation overseeing tax preparers, hasn’t yet done so.

In the absence of a law providing broad authority, the agency has begun a voluntary education and registration program.

Koskinen, the IRS commissioner, explained the need for national minimum standards to a congressional panel in March, saying that right now, anyone can “set up shop down the street, in a community center and start preparing tax returns – whether they know anything about the tax code or not.”

What really concerns Koskinen, he said, are preparers “in immigrant communities and low income communities who hang out a shingle and say ‘come with me, I’ll get you a bigger refund than anybody else,’” he said. “That obviously can’t be legal.”

Dan Alban, the lead attorney who opposed the now-defunct IRS proposal, said that more rules will not reduce errors and fraud. “The problem is tax code complexity,” said Alban, of the Institute for Justice, which promotes free enterprise and seeks to reduce regulations.

He urges taxpayers looking for a preparer to shop around, consider free help from taxpayer clinics, and insist on getting a preparer’s identification number, among other things. Tax preparers are advisers only, and the ultimate responsibility for what’s in a return rests with the taxpayer.

He also suggests filers avoid tax preparers seeking a percentage of the refund or any who claim they can obtain large refunds.

Rather than tackle the problem with regulations, Alban says the IRS should more aggressively pursue rogue preparers. “The focus needs to be shifted to enforcement efforts,” Alban said.

But for an agency adjusting to several rounds of budget cuts and receiving $346 million less this year than last, that is not a realistic expectation, says Chi Chi Wu, staff attorney for the National Consumer Law Center.

“It’s simply ridiculous,” says Wu, who wants national licensing and competency standards for tax preparers. Without them, Wu says, “It only hurts the American taxpayer and the US Treasury.”

Scripps reporter Alicia Alvarez contributed to this story.