Yes, it's tax prep time again.
Naturally, a large segment of the population is eager to file their tax returns and get some money back from the government. They don't want to leave behind their share-after all, approximately $950 million goes unclaimed by taxpayers every year. Of course, there's also the risk that you will file your taxes only to be informed that you owe the government even more in taxes.
Or maybe you're the shady, Walter White type? There could be plenty of skeletons in your proverbial closet that taxes can inadvertently bring to light. For the criminal element, as we all know from our favorite crime dramas, taxes force you to do some fancy switcheroos to keep any unscrupulous activity out of your tax forms.
But these are not the only risks in the world of tax prep, even for normal folks. There are other tax prep mistakes that can mean loss of money and even legal trouble if you fall into them.
Luckily, if you know what to look for, you can easily avoid these tax prep dangers and keep your taxes squeaky clean. Here are six tax prep dangers you want to avoid at all costs:
You might not be aware of it, but there are legitimate tax preparers who can help you put together your tax paperwork and there are illegitimate tax preparers. Lee Reams at TaxBuzz explains it this way:
"The IRS monitors individuals who prepare taxes for money; in other words, anyone who is paid for the preparation of a tax return. All paid preparers are required to register with the IRS receives a PTIN: a Preparer Tax Identification Number. This PTIN must be included on all of the returns that the individual prepares for their clients. Apart from the initial registration, a PTIN creates an audit trail for the IRS to follow; they now know who is preparing certain tax returns. Without a PTIN, the IRS must assume that an individual has prepared their own tax return."
When you go with a someone who has a PTIN, it acts as a sort of insurance, in case problems arise with your tax filings. If you get audited by the iRS, they will typically represent you. They are required to abide by a code of ethics that keeps them from doing shady things like inflating expenses or deflating earnings. It also ensures that they will do their due diligence to make sure your return is airtight.
Unfortunately, the opposite is true if your preparer doesn't have a PTIN. If you get audited, you're on your own. Whatever mistakes they make-intentional or unintentional-are linked just to you. Whatever issues the IRS finds with the your filings stop with you.
How to avoid it: before you have someone prepare your taxes, ask to see their PTIN.
When it comes to tax prep software, you get what you pay for. While many paid tax prep software packages will automatically tell you if your numbers aren't adding up, too many of the free ones don't. Paid software will usually give you advice to help you boost your credits and exemptions, but not free software.
The result is that, for all the money they saved on a free software package, tax filers can end up paying more in taxes or at least getting a smaller refund. At worst, these mistakes could bring their filings to the attention of the IRS and bring on an audit.
How to avoid it: seek out paid tax prep software. You can't afford not to.
Yep, these guys are everywhere, anywhere where people can be tricked into giving away their most critical personal information. Often tax prep-related identity thieves will pose as members of the Free Tax Alliance and take you to a non-IRS website to download their software, which then steals your personal information.
How to avoid it: the IRS is the only legitimate way to access the Free File software and forms. If they try to take you to a non-IRS.gov website, give them the slip.
Why wait for your tax return to be processed when you can get it in cold, hard cash today? As you can guess by the name, these scams involve companies who prepare people's taxes, give them short-term loans to the amount of what they say they will get in tax returns, file the returns, and then extract exorbitant fees when the tax refunds arrive.
Closely associated with this hazard are companies who offer short-term loans just to snag people's personal information-enough to file someone's taxes without their knowledge-and then collect the tax refund for themselves.
How to avoid it: don't trust anyone who offers to give you a short-term loan to file your taxes for you.
Recently, two preparers at Mo Money Taxes were taken to court, in danger of spending up to 8 years in prison. Their crime? Filing for tax credits that customers were not entitled to receive and costing the government between $250,000 and $550,000. In other words, true to their company's name, they promised to get their customers bigger tax returns-even if it meant meant fudging the numbers.
While tax preparers or makers of tax prep software can claim to get you the maximum tax return to which you are entitled, no one is allowed to submit false numbers in their tax returns.
How to avoid it: stay away from tax preparers who claim they can get you a bigger refund than other preparers can or who base their fee on a percentage of the refund amount. These are both signs that your preparer is motivated by something more than submitting an accurate tax return.
What was the most commonly reported IRS scam last year? This one, in which scammers pretending to be IRS agents-armed with fake badge numbers and the last four digits of people's Social Security numbers-call people and tell them they owe the IRS money. If they don't pay up, the scammers say, usually through a preloaded debit card or wire transfer, they might face arrest, loss of their driver's license, or deportation. Then they follow up with fake IRS emails and even fake phone calls from the police.
How to avoid it: remember, the IRS almost always contacts people first by mail when it comes to unpaid taxes. Hang up on anyone who claims to be the IRS and asks for payment by prepaid debit card or wire transfer, or for your credit card number over the phone.
Fortunately, there are plenty of great tax prep solutions out there, and the greatest proof of this is the feedback of real customers. To see which tax prep services are rated highest by customers, visit our Tax Prep Reviews page.