Most folks who have a business or work and pay taxes, we would hope, will choose a licensed tax practitioner to do their tax return. In some cases, where a taxpayer has a very simple tax situation, they can do it themselves or be somewhat confident in having someone else do their return. This does, however, have its risks.
On a recent visit to Las Vegas, I met a young couple that last year went to one of these unlicensed tax preparers. There are a lot of these in Las Vegas. This paid preparer uses a popular off-the-shelf program to do lots of people’s tax returns. He does one return, prints it out, deletes it and enters another return. This preparer does not sign the returns. There is no record of him on the returns, and no PTIN number, which is required of all paid tax preparers. In this case, he prepared the husband’s return as single with a made up large amount as unreimbursed employee expenses he put on a Schedule A itemized deduction.
He then prepared the wife’s return as head of household using their newborn child as the dependent, giving her earned income tax credit (EITC). This gave them both a much larger refund than they should have received. The EITC is a refundable credit, which means you can get a refund of the amount of credit over your tax liability. A refundable credit is considered the same as withholding, or paid in amounts. The abuse of these refundable credits like the EITC and the child tax credit (CTC) are why the IRS keeps getting more particular – because of diligence requirements on the part of tax preparers when doing any return that has refundable credits, and rightly so. The IRS estimates that 21 to 26 percent of EITC claims are in error, some unintentional, some intentional. Now it would be a big problem for this couple if the IRS finds this and wants to penalize them. All taxpayers are ultimately responsible for what is on their tax returns, and should be thorough and diligent on all the information that goes on them.
To be clear, these are not clients of mine. When I met them, they asked me “what I did.” Upon hearing I was an EA, and what an EA was and what I did, they proceeded to ask me questions about their return. They probably were having second thoughts about it, for some reason. But, it is a good example of what is going on out there in tax preparer land. This demonstrates why, in the long run, it can be beneficial to pay a licensed tax practitioner to do your tax returns, even simple ones. There are a great many life events and other occurrences that can have a huge impact on your tax situation.
There are two groups of licensed tax practitioners that are generally known: Enrolled Agents (EA), and Certified Public Accountants (CPA). Most people seem to know about CPAs. CPAs and lawyers are licensed by and governed by the different state boards and laws and can only operate in the states where they are licensed. Few people seem to know about EAs, what an EA is, and what an EA does, or can do. EAs are the only federally licensed tax practitioner, and can operate in all 50 states.
Enrolled Agents have been around since 1884, and were authorized by Congress initially to help in questionable claims for Civil War losses. Over the years, the role of the EA has been expanded. In 1913, the role was expanded to include tax preparation and representation of people when dealing with the U.S. Department of the Treasury.
EAs are NOT employees of the IRS and have a duty to best serve the interest of their clients. EAs tend to focus on tax preparation, and some specialize in tax resolution issues.
Of course, a good tax return, and the best defense to avoid tax problems to begin with starts with the taxpayer, along with the accuracy, clarity, detail and thoroughness of all relevant information that goes on it. QCBN
By Ernie Gallardo
Ernie L Gallardo, EA, is an Enrolled Agent with 15 years of tax experience in the Prescott area, a member of the American Society of Tax Problem Solvers (ASTPS), and the National Association of Tax Professionals (NATP). Gallardo Is the owner of Tycho Tax Services. He can be reached by phone/text 24/7 at
928-899-2434, email at info@TychoTaxServices.com or on the website at TychoTaxServices.com.
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