American taxpayers are now facing even bigger headaches than the annual April deadline as a result of tax preparation fraud. Mounting lawsuits against popular and local tax preparation services allege a number of fraud issues ranging from illegal refund inflation to enabling identity theft.
Below are a few emerging tax fraud schemes.
1. Illegally High Fees and Limited Payment Options
A Chicago tax preparation firm, the Individual Income Tax Service, is being sued by Illinois Attorney General Lisa Madigan for allegedly misleading its customers into paying illegally high fees.
The firm collected up to $200,000 in illegal service fees by telling customers to take out a “Refund Anticipation Check” to pay for the fees. The customers were told that this was their only option for paying the illegally high service fees.
Refund Anticipation Checks are essentially small loans with high interest rates. Refund Anticipation Loans and Checks often:
- Target low- and moderate-income workers who can’t immediately pay tax preparer service fees and who receive the Earned Income Tax Credit.
- Are advertised as “Money Now” and “Instant Refunds,” but don’t actually speed up the actual refund process.
- Borrow against your own refund.
- Must be paid back even if the IRS delays or denies your refund or your refund is less than the loan or check’s principal.
- Charge an APR that can be much higher than that of credit cards—from about 50 to 500%.
- Can damage your credit score.
By misleading its customers into using Refund Anticipation Checks, the Chicago firm is facing scrutiny for both the high preparation fees and interest collected from their service.
2. Refund Inflation
Two additional U.S. tax preparation service owners are facing lawsuits for illegally filing customer tax returns that inflated refunds. Most customers were unaware of the refund inflation and now facing financial and legal consequences from the IRS.
The U.S. Department of Justice filed a lawsuit against Jessica Leverett, who owns four tax preparation services in Birmingham, AL. Leverett and her employees are alleged to have cheated the U.S. government out of more than $2.6 million in claimed refunds for un-entitled customers by:
- Fabricating self-employment businesses and business losses to offset taxable income and increase Earned Income Tax Credit,
- Mischaracterizing small business income as household employee wages to avoid paying required self-employment tax, and
- Claiming 430 undeserved education credits exceeding $600,000.
Liberty Tax Service faces similar allegations in a lawsuit filed in South Carolina. Christopher Haynes owns three franchises in the Columbia area for which he hired employees without previous tax preparation experience.
Haynes and his employees prepared up to 1,500 customer tax returns which received inflated refund amounts. The methods Haynes and his employees used to inflate refunds include:
- Falsifying or inflating Schedule C income and expenses (profit/loss from business)
- Claiming nonexistent dependents
- Falsifying filing statuses
- Improperly reimbursing employee business expenses
3. Identity Theft and Fraudulent Tax Filing
Other cases of tax fraud are emerging through security breaches as opposed to malicious malpractice on the preparer’s behalf. Intuit, Inc., maker of popular tax preparation software TurboTax, faces multiple allegations that may become a class-action lawsuit over fraudulent tax filings through its TurboTax software.
Two victims of identity theft recently filed a lawsuit against Intuit. They cite allegedly poor security protocols that enabled identity thieves to use stolen information to file tax returns and claim refunds using TurboTax:
- Christine Diaz, one of the plaintiffs, claims she hadn’t used the service since 2011 but received a $242 bill. An identity thief used the service to file her 2015 return in several states.
- Michelle Fugatt claims she never used TurboTax but still experienced a similar tax fraud situation involving the service.
Intuit had temporarily halted state tax return transactions in February for 24 hours following an increase in suspicious activity. After services were resumed, a former employee alerted authorities to Intuit’s alleged failure to adequately stop suspicious filings or protect consumer information.
Another lawsuit in New Jersey claims that Intuit illegally attempted to avoid liability in identity theft cases through language in the TurboTax Terms & Conditions. Some language used may violate NJ law and strips consumers’ rights under the NJ Product Liability Act, among other statutes being investigated.
Protect your rights
Tax laws and the standards tax preparation services are required to follow can complicate your efforts if you’re considering a lawsuit similar to the ones above. Identity theft is an added risk factor to consider. Here are a few quick tips for securing your information against identity theft:
- Never carry your SSID card or any documents containing your SSN or Individual Taxpayer ID Number (ITIN).
- Don’t give a business or person your SSN or ITIN in person, over the phone, or through messaging unless required.
- You should provide this information only if you initiated contact or you are sure about the security of the transaction.
- Secure and protect your financial and personal info at home.
- Use up-to-date personal computer security software and regularly change passwords for online accounts.
- Check your credit report every 12 months for free.
If you believe you’re a victim of tax preparation malpractice, consult with an experienced tax law attorney who can educate you about and protect your rights.