As tax season steadily approaches, many taxpayers will decide that they need to seek out professional tax advice.
The tax-preparation industry is mostly made up of honest individuals and companies that have the knowledge to assist you. You may have already seen commercials for them on TV or received advertisements in the mail.
However, the industry also includes some unscrupulous figures who make their money by taking advantage of unsuspecting taxpayers. I know because I’ve seen the effects firsthand. At Legal Aid Society of Middle Tennessee and the Cumberlands, where I’m an attorney, about 30 percent of our clients seek our help with issues related to bad tax preparation, tax preparer fraud or identity theft. These situations are more widespread than you might think, and can have a devastating effect on individuals and families.
You don’t have to be a financial expert to be able to spot when your tax adviser isn’t on the level. Here are a few tips to keep in mind when seeking tax advice.
Look closely at what you’re paying for.
Tax advisors are entitled to receive money for their services, but customers are entitled to an upfront conversation about how much they’re agreeing to pay. So before you sign on the dotted line, make sure you have that conversation.
Don’t be afraid to ask questions. Specifically, you’ll want an explanation of the various fees being charged and how they’re determined. Look out for hidden fees such as warranties, processing or electronic filing charges. When a preparer bases their compensation on a percentage of your refund, that’s a possible warning sign, as it could incentivize them to inflate your refund in a dishonest way.
Tread carefully with refund anticipation checks
It’s a great feeling to learn that you’re getting a big tax refund. But don’t start spending your money before it’s in your hands.
Some tax-preparation companies take advantage of customers’ lack of patience by offering refund anticipation checks — basically, an advance on your refund, but offered with an extremely high interest rate that can be 200 percent or more. Some companies advertise that they do not charge interest but charge other fees to make up for the lost interest fees.
Although refund anticipation checks do sometimes make it possible for some low-income individuals to afford tax preparation services (because the preparation fees are deducted from the refund check), these checks are still a bad deal for taxpayers, because they end up eating up a large chunk of the refund they’re entitled to. Try to stick it out until your actual check from the government arrives.
Know your tax preparer
Although increased oversight of tax return preparers has been discussed on a federal level, the current level of regulation of the tax-preparation industry here in Tennessee is very low. This understandably can make consumers nervous about handing over personal information.
At Legal Aid Society, we’ve worked on cases involving brazenly illegal behavior by tax preparers, such as depositing taxpayers’ refunds directly into their own personal accounts. Another scam involves the tax preparer filing for tax credits that a taxpayer didn’t qualify for, then taking a portion of the refund for themselves and passing on the remainder to the taxpayer.
The taxpayer is often unaware of any of this until they’re audited by the IRS for the fraudulent tax credit.
When selecting a tax preparer, look for one with a good reputation that can be verified by your friends and neighbors.
Especially avoid tax preparers that don’t have a yearlong presence in your community and only open their shop during tax season. Before you hand over your financial information, make sure you ask your tax preparer for their IRS-provided preparer tax identification number (PTIN).
Understand your options
Unfortunately, many fraudulent schemes by tax preparers target neighborhoods that have high numbers of immigrants and low-income customers. But those taxpayers should know that there are options available to help them avoid falling prey to these schemes.
The IRS offers free tax preparation and filing services to low and moderate-income customers through its online FreeFile service (www.irs.gov). In addition, for non-computer-savvy taxpayers, the IRS provides Volunteer Income Tax Assistance (VITA) sites that offer free tax preparation for low-income, elderly, disabled and limited-English-proficient individuals. All the volunteers participating in this program are certified by the IRS, which provides an added layer of trustworthiness. You can learn more about the VITA program and find a site by visiting www.irs.gov or by calling 1-800-906-9887.
If you’re a low-income individual and need legal assistance due to a federal income tax problem, contact Legal Aid Society’s Tennessee Taxpayer Project toll free at 1-866-481-3669.
Mary Michelle Gillum is an attorney with Legal Aid Society of Middle Tennessee and the Cumberlands, Tennessee’s largest non-profit law firm. Gillum directs the Tennessee Taxpayer Project, a Low Income Taxpayer Clinic. Learn more about Legal Aid Society at www.las.org.