Tax Scams: How to Protect Your Small Business
Don’t fail prey to common tax scams. Here’s our list of red flags so you can protect you and your small business.
When you’re a small business owner, you learn to become a jack-of-all-trades when it comes to running and managing your business. Sometimes, though, it pays to outsource to the pros for certain needs. Outsourcing often makes sense when it comes to financial planning, including accounting and tax prep. These areas can be complex and require specialized knowledge of tax law. Having a pro can be invaluable. They can help you answer questions and make sure you’re not over or under-deducting. They can also help you do some basic tax planning to minimize your tax liability going forward.
Unfortunately, there are various tax scams to take advantage of your good faith and your business. You want to make sure that you properly vet your accountants and tax preparers so you know they’ll comply with the law. One of the most common tax scams involves filing false returns without business owners’ knowledge or consent, then skimming from that refund amount. That’s taking money straight out of your pocket.
Who Is Liable For Your Tax Return?
It’s important to be aware that you’re the one who’s ultimately legally responsible for vouching for the authenticity of your tax documents. Even if you use a paid tax adviser, you can be held legally liable for their false reporting or inaccuracies. When you sign the return, you’re swearing that everything in it is accurate and that you stand by that information. If a tax preparer has put in the wrong information, you’re still on the hook.
When they review your return, the IRS looks for 2 different issues: negligence and fraud. “Negligence” means that a reasonable person would have known the return was wrong. If they decide to pursue the matter, you may have to pay an extra 20% of your tax bill as a fine. “Fraud” means the IRS believes that you intentionally included false or misleading information on your return in order to get out of paying your taxes. That comes with a fine of 75% of your tax bill. The IRS pursues relatively few cases, but you still don’t want to risk being in that position. Even without the IRS, you need to beware of tax scams. Your tax preparer could be stealing from you by skimming your return if you don’t ensure the money gets deposited straight from the IRS into your bank account.
What can you do to avoid being the victim of a tax scam or illegal tax practices? In this case, knowledge is power. Here are common red flags to look out for to protect yourself and your business from unethical tax preparers or practices.
Red Flag #1: No “Preparer Tax ID Number”
When hiring someone to advise on or prepare your taxes, the first thing to check is whether or not they’re a running a legitimate tax business. All paid tax preparation professionals are assigned a “Preparer Tax Identification Number” (PTIN) by the IRS. Verify your tax professional’s ID number before you move ahead. If they don’t have a PTIN, they’re not legitimate.
Red Flag #2: Better Business Bureau Problems
The second thing to check when vetting potential tax prep pros is their complete history with the Better Business Bureau (“BBB”). The BBB works as a consumer watchdog service to protect customers from fraudulent business practices. The BBB will maintain a database of complaints, lawsuits, and reports of fraud. It’s important to look at the tax preparer’s history to see if there have been reports of unethical business practices or consumer complaints.
Red Flag #3: No E-Filing
Technology is your friend in the world of taxes, and allows you to follow up and monitor your filings. Use of e-filing is generally considered safer and less likely to result in fraud, since you can easily verify the info which is filed. Check that your tax pros uses e-file. Those who file more than 10 tax returns per year are required to do so, therefore refusal to use e-file may mean you are dealing with someone who is inexperienced.
Red Flag #4: Charges A Fee Based On A Percentage Of Your Refund
Beware of preparers who want a portion of your refund. Unscrupulous providers may try to base the size of their fee on the amount of refund they can earn you and then fudge your numbers so they earn more. An ethical preparer will bill a flat fee for their services based on your specific business needs.
Red Flag #5: Fails To Provide You With Copies Of All Records
Your tax prep pro should provide you with copies of all documents pertaining to your tax filing. Of course, it’s always wise to keep copies all of business records, but this is especially true with regard to tax documents. Make sure you retain your tax documents for your records, in case you need to dispute or verify any of these records in the future.
Red Flag #6: Asks You To Sign A Blank Return
Be wary before you sign on the dotted line. This may seem obvious, but you should never sign a blank return. Some fraudulent preparers will ask that you sign a blank return and then fill in that blank return with false information later.
Red Flag #7: Wants To Deposit Your Refund Check Into Their Account
Of course, your tax refund check should always go directly to you. There’s never a reason for your refund check to be deposited into a tax preparers’ account. This is one of the most common tax scams. They’ll take your refund into their account, write you a check, file an altered return claiming a bigger refund, and pocket the difference.
Red Flag #8: Refuses To Sign Your Return
Paid tax preparers are required by law to sign returns they prepare, as well as include their PTIN ID. A tax preparer who refuses to sign your return or include their PTIN number is not complying with the law.
Red Flag #9: Asks You To Bend Or Break The Law
Don’t compromise your own ethics. Never agree to sign off on a falsely inflated return or a deduction which is not accurate. If you defraud the IRS, even without knowledge or consent, you may be as liable as the preparer for the falsely provided info. By signing the forms, you are vowing that the information provided is correct and complete.
So Where Can You Get Your Taxes Done?
It seems like there’s a lot to watch out for in the tax preparer world, and you have a lot on your plate just running your business. Where can you go for help with your taxes without fear of tax scams?
First, you do have the option to file yourself. It can be complicated, but you may be able to work through it with the help of tax preparation software and the guides on the IRS website. You’ll be able to file online and keep track of your return yourself. Remember that if you use tax prep software, you’re not getting any of the expertise that comes with an experienced CPA or tax preparer. They can look at your business’s income and expenses and tell you how to best structure your return based on their years of experience. Tax prep software can only work with your own personal experience; it won’t be able to make any helpful suggestions beyond the basics to save you money. Your CPA or tax preparer will also be able to respond to the IRS in case of trouble, and no tax prep software can do that.
If you don’t feel comfortable managing your own tax return, you’ll need to find a pro. There are a few big box tax advising companies out there, but that’s not typically the best place to look. Those advisers are usually paid based on the number of returns they file, so they’re not going to give you their full attention. They also don’t know you and your business, so they aren’t in the best position to help you with your tax planning.
Instead, consider building a relationship with a local accountant. If your business is small, you can talk to your accountant about a reasonable fee structure to keep the expense manageable. Talk about your needs. Simple return preparation will cost less than tax planning, and that may be all you need. In general, you can expect to pay a couple hundred dollars for a simple tax return for a company with few or no employees. If your business is larger or more complicated, it will cost more, but you’ll also have more need of a CPA’s expertise. You can keep the costs down by providing your full financial information up front and in an organized fashion so your CPA doesn’t have to spend time decoding your books and can get straight to the tax return.
Protect Your Small Business From Tax Scams
Nobody likes doing taxes, but choosing the wrong tax preparer can land you in hot water. Watch out for these red flags that indicate you might be the target of tax scams. If you’re not comfortable doing your returns yourself, consider building a relationship with a local accountant (keeping those red flags in mind) so that a professional can manage your tax needs.
If you think you’ve been the victim of unethical tax practices, you can report them to the IRS by following the instructions in this guide.