During tax filing season, it’s important to consider the credentials and qualifications of a tax preparer, as most are unlicensed and many charge “unconscionable” sums for simple returns, according to Patrick Thomas, director of the Notre Dame Law School’s Tax Clinic, a federally funded Low Income Taxpayer Clinic.
“Most tax preparers are unlicensed, often work for only a portion of the year and offer minimal assurances should the IRS identify an error on the tax return,” says Thomas, a licensed Indiana attorney and professor of the practice at Notre Dame. “Moreover, many unlicensed tax preparers — even the ‘big-box’ chains like H&R Block — charge unconscionable sums for preparation of relatively simple tax returns. Many taxpayers who rely on the earned income credit, child tax credit and the newer premium tax credit through the Affordable Care Act often pay hundreds of dollars — I’ve even seen nearly $1,000 — to obtain a refund that can constitute greater than 25 percent of their cash income for the year.”
Thomas says if a taxpayer has a relatively simple tax return claiming the earned income credit, a higher fee corresponds with lower return preparation quality.
“Preparers often hide these fees within the substantial refunds that clients receive,” Thomas warns. “What’s an $800 fee, when you’re getting a $7,500 refund? Worse yet, many preparers may market that taxpayer’s refund as $6,700 — the gross refund, less their fee — such that taxpayers may never find out about the exorbitant price they just paid.”
Taxpayers should check the credentials, experience and pricing of their tax preparer before agreeing to have their return prepared. More experienced preparers, or those with a CPA or “enrolled agent” designation, may justifiably charge more due to their heightened expertise. But taxpayers are best served in figuring this out beforehand and negotiating an upfront price.
“Many taxpayers who patronize unlicensed tax preparers often find themselves in trouble with the IRS,” Thomas says. “These preparers have an incentive to increase the refund as far as possible, even using unlawful means to do so. For example, an unscrupulous preparer may advise a married couple with two children to each file a return claiming the ‘head of household’ filing status. In some circumstances, this would produce a refund of $1,000 more than the couple would receive filing jointly. While an extra $1,000 may be desperately needed, taxpayers often find themselves in my office facing a bill from the IRS that may be eight times that ‘extra’ amount — seeking the entire refund back, plus hefty penalties and interest.”
Thomas says heavily advertised tax resolution services like Optima Tax Relief can charge thousands of dollars to those who can least afford it.
“Low Income Taxpayer Clinics are the most economical sources of counsel for anyone with complicated IRS problems,” he says. “Funded by a grant from the IRS but completely independent from the agency, these clinics, like ours at Notre Dame, do not charge for services.”
While the new tax law does provide moderate tax relief, Thomas warns, it also provides unscrupulous tax preparers with new opportunities of concern to tax practitioners.
“The new ‘qualified business income’ deduction — which allows certain individuals to take an automatic 20 percent deduction against their qualified business income — is ripe for gaming and abuse,” Thomas says. “Taxpayers will need to be cautious of their tax preparer’s advice to claim this deduction and should ask for a detailed explanation of why they qualify, should the tax preparer suggest it.
“Taxpayers should be particularly cautious if preparers — especially unlicensed preparers — advise forming separate business entities to take advantage of this deduction. Taxpayers contemplating this course of action should seek legal counsel, as the consequences of this decision can be far reaching.”
The Notre Dame Tax Clinic, located at 725 Howard St. in South Bend, represents clients in controversies with the IRS and educates individuals about their rights and responsibilities as taxpayers. Thomas supervises student attorneys who take the lead in client representation before the IRS.
Thomas is actively involved in tax policy and tax administration reforms in Indiana and nationally and recently was appointed to the Indiana Department of Revenue’s Commissioner’s Tax Advisory Council, which will advise the department on a number of tax issues affecting Hoosier taxpayers.
Contact: Patrick Thomas, 574-631-9149, pthomas3@nd.edu; Notre Dame Tax Clinic, 574-631-3272