Black Market Tax Preparers Continue To Defy IRS
When the Internal Revenue Service announced intentions to regulate tax preparers, the idea was to save taxpayers from “unscrupulous” (IRS’ favorite word in this context) preparers who wished to take advantage of them.
The IRS didn't contemplate the notion that some taxpayers simply don’t wish to be saved.
Since 2006, the IRS has made efforts to increase oversight of tax preparers a key component of taxpayer services. The arguments for and against regulating preparers are, at this point, well known. The IRS claimed it needed to pass these regulations to “ensure uniform and high ethical standards of conduct for all tax return preparers.” Those opposed to the regulations argued that such mechanisms already exist under federal law and new regulations simply create unnecessary bars to competition.
The result was a licensing system, of sorts, that requires all preparers who are “paid to prepare or assist in preparing federal tax returns or claims for refund” to have a PTIN, or a Preparer Tax Identification Number. If you have a paid preparer, you've seen the PTIN on your return, just below your own signature.
In addition to a PTIN, the IRS also sought to enforce a new designation, Registered Tax Return Preparer, for preparers who did not meet an exemption or exception. That designation was shot down earlier this year when a federal judge ruled in Loving v. U.S. that IRS did not have the lawful authority to regulate preparers in that way (the case is being appealed).
For now, however, in order to prepare returns commercially, you have to register with the IRS and get a PTIN. A PTIN doesn’t make you a better preparer. It simply means that you’re on a list. A list that cost you $64.25 each year.
That keeps taxpayers safe, right? Knowing that their tax preparers are on that list?
Not exactly. Notwithstanding that being on the list doesn't guarantee that you have any idea what you’re doing, a number of tax preparers are still offering tax services without obtaining a PTIN.
In 2011, the IRS pegged the number of unlisted preparers at 100,000, or about 1 in 8 of every preparers. To bolster compliance, beginning in 2012, the IRS began sending letters to those preparers who prepared returns for the 2011 tax season but failed to register for a PTIN. That only worked, of course, if tax preparers signed the returns. The solution for tax preparers who didn’t want to register and pay the fee? They simply don’t sign the returns.
And yes, that’s against the rules. But a number of paid tax preparers do it anyway. They are referred to in the business as “black market preparers” or sometimes, “ghost” tax preparers.
We tend to associate the black market with items like booze, drugs, guns and cigarettes – underground transactions to skirt existing laws. But that’s exactly what is happening in the tax world. It’s just maybe not as sexy.
Black market tax preparers don’t hide under the cover of night, only opening their doors with a secret handshake. They don’t guard their turf with automatic weapons. And they don’t live in fear of getting caught.
Black market preparers set up shop around tax time, usually as a short time rental in a busy area. Most will set up early since their target market tends to be taxpayers banking on a refund: statistically, those taxpayers file early (last year, one-third of all refunds were issued in February). They tout “big and fast” tax refunds to taxpayers, almost always in combination with a rapid-refund type loan. Fees are advertised as very low to get taxpayers in the door but the costs for other services – like refund loans – quickly add up to thousands of dollars. And since many of these taxpayers can’t afford to pay high fees for returns, the preparers do them one more “service” by tying tax prep and loan fees to the size of the anticipated refunds. The result? Incentive after incentive to cheat.
Business for these preparers grows not because of newspaper advertising or LinkedIn profiles: it’s word of mouth. Around tax time, word on the street quickly becomes that “XYZ Preparer” can get you the biggest refund in the fastest period of time.
And IRS is often none the wiser to all of this activity because it’s nearly impossible to track. Why? That box at the bottom for the PTIN? It remains empty. In fact, there’s no name or address listed for a preparer. The returns are filed with IRS as though they were self-prepared.
It’s much more common than you think: in 2011, Lonnie Gary EA, USTCP Chair, National Association of Enrolled Agents, testified before Congress that a “significant number” of taxpayers use black market preparers (downloads as a pdf). Our office has witnessed the post-audit aftermath of these cases – and the potential for audit is fairly high since taxpayers are often talked into claiming bogus deductions and credits in order to boost refund dollars. Tactics rarely vary: the classic scenario involves Head of Household filing status (regardless of whether it’s appropriate), jacked up Earned Income Tax Credit (since it’s refundable), education credits (since they are often not checked) and Schedule C expenses (since the taxpayer doesn’t have to itemize to claim those). The thinking tends to follow the notion that once you’you've made up one little white lie, what’s to stop you from the next?
Eventually, all of those missteps do catch up to the taxpayers. By this time, however, the tax preparer is out of the picture. He or she won’t return calls – if taxpayer ever had a number to begin with. And clearly, there’s no audit support. In almost every case, the taxpayer braves the audit on their own. They have no documentation and no real excuses. Often, they never even mention the black market tax preparer at all out of fear of making their situation worse. The result? Refund repayments. Tax obligations. Penalties. Interest. And a lot of grief.
Chances are, you’d be surprised if you met a taxpayer who admitted using a black market preparer: they are surprisingly normal. I say “surprisingly” because I think we want to believe that the sort of folks who would engage in this activity are stereotypes or simply bad people – perhaps unemployed or engaged in illicit activities. But that’s not the case. They’re nurses and supervisors and retail workers. They’re moms and dads and sons and daughters. They have families and houses and jobs. And they’ve made poor choices – often at the urging of friends and families who swear they won’t get caught – which are exacerbated by pressures from these black market preparers.
I fully expect to see more – not less – of these results. The reality is, to quote Joe Kristan, tax is hard. And it’s getting harder. The Tax Code is becoming increasingly complicated. And tax preparers make it easier to navigate. A 2003 GAO study (downloads as a pdf) found that nearly 80% of taxpayers were “generally confident” that they would not pay more tax than was necessary by using a paid preparer and nearly 90% of those who used a tax preparer would use one in the future.
While the IRS initially signaled that PTIN registration would help ferret out black market preparers, it seems to be doing just the opposite: chasing more unscrupulous preparers underground. IRS Regulations impose significant penalties on tax preparers who fail to sign and/or use a PTIN for commercially prepared returns. But – and there’s a huge but – all of the punishments in the world are meaningless if you can’t pin down the bad behavior. That’s exactly what these black market preparers are counting on.
Source: Forbes Magazine at http://www.forbes.com/sites/kellyphillipserb/2013/11/18/black-market-tax-preparers-continue-to-defy-irs/