IRS Withholding Refunds for Victims of Tax Preparer Fraud

by Bruce Givner on February 12, 2015

Victims of tax preparer fraud, whose preparers filed their taxes and then took the return for themselves, have yet to receive their refunds from the Internal Revenue Service (IRS) partly due to the agency’s concerns of collusion, according to a senior attorney from the National Taxpayer Advocate. Some of these victims have been waiting since 2008.

Christopher Lee is a senior attorney for the Taxpayer Advocate Service (TAS), an independent organization within the IRS tasked with helping taxpayers resolve tax problems that haven’t been settled through normal channels. According to Lee, who spoke on January 31 at a meeting of the American Bar Association Section of Taxation in Houston, “Victims are usually the most vulnerable taxpayers.” He noted that the first two dozen taxpayers the TAS worked with had an average annual income of $17,500, and were requesting refunds averaging about $2,500.

Victims of tax preparer fraud are often required to take multiple steps to resolve their problems, including filing a Form 14157, Complaint: Tax Return Preparer, as well as filing a correct tax return and completing a police report. Conversely, victims of tax identity theft must only complete an affidavit.

The TAS, which has been working on this problem since 2010, has included its concerns on the issue in its 2011-2013 annual reports to Congress. Most recently, National Taxpayer Advocate Nina Olsen included in the report to Congress in June 2014 a piece called “A Sad Story,” reflecting the organization’s frustration in its dealings with the IRS on this matter.

According to Lee, IRS officials worry about victim and preparer collusion in preparing the false returns. The IRS commissioner agreed in March 2014 that refunds should be given to victims provided they file a police report, but this may be easier said than done for some victims. For example, due to the amount of time that has passed since the incident, some police departments may not want to take a report on the crime.

Earlier this year, the TAS received a memo from the IRS deputy commissioner indicating that the agency had worked through the outstanding issues and was ready to develop procedures to carry out the commissioner’s decision. Lee is skeptical: “We hope that means in the next month or two. But since we’ve been working on this since 2010, we don’t have that much confidence until we actually see the procedures.”

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