Learn the Warning Signs and Essential Steps to Protect Yourself
Hiring a tax preparer is supposed to make tax filing easier and ensure compliance with complex regulations. However, if your preparer becomes the target of an IRS investigation, it could put you at serious risk of audits, fines, or even felony charges. The IRS Criminal Investigation Division (IRS-CI) scrutinizes tax preparers who submit fraudulent returns, potentially implicating clients in the process.
When the IRS concludes that a taxpayer “knew or should have known” about false deductions, inflated credits, or other fraudulent claims, the consequences can escalate. You could face civil penalties, criminal charges, or public exposure from a tax prosecution.
Red Flags That Your Tax Preparer May Be Under Investigation
Although the IRS does not publicly announce all investigations, there are signs to watch for:
- Abrupt Re-filings: Unexplained amendments to previous returns with promises of larger refunds or drastically lower liabilities.
- Evasive Communication: Defensive or dismissive responses when you question deductions or credits.
- Rumors of IRS Contact: Indications that your preparer is being questioned by IRS criminal tax investigators.
- Cash Payment Demands: Requests for cash fees or instructions to falsify records are major red flags.
These warning signs suggest it’s time to evaluate your tax filings and take protective action.
Why Staying with a Targeted Preparer is Dangerous
If the IRS suspects your preparer of fraudulent activities, every return they’ve touched becomes a potential risk point. The IRS may view clients as complicit, especially if deductions or credits appear suspicious.
Continuing to work with a preparer under investigation could harm you if they prioritize their legal defense over your interests. Protect yourself by severing ties and consulting a qualified tax professional.
Three Critical Steps to Protect Yourself
1. Gather All Relevant Records
Collect your filed tax returns, engagement letters, and any supporting documentation. This paper trail can help establish that you acted in good faith and followed what appeared to be professional advice.
2. Seek a Dual-Licensed Tax Attorney-CPA
A tax attorney offers critical legal protections that a regular tax preparer cannot. Conversations with an attorney are protected by attorney-client privilege, whereas tax preparers may be forced to disclose information in a legal proceeding.
An attorney can also engage consulting accountants under a Kovel letter, extending legal privilege to their work. This ensures a more thorough analysis of your returns without exposing you to further risk.
3. Consider Amending Returns or Voluntary Disclosure
If your returns contain errors, filing a corrected return or making a voluntary disclosure can help minimize penalties. A tax attorney can advise on the best strategy to address inaccuracies and avoid criminal charges.
The Importance of Acting Quickly
Delaying action can increase your legal and financial risks. By consulting a tax attorney early, you can formulate a strategy to protect yourself and potentially reduce the severity of IRS penalties.
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