For Oscar Sotelo, tax season was a gold mine for two years running. He found a man who prepared taxes in the Central Valley, promised big refunds -- and delivered.
Then the IRS letters started coming. Sotelo was never supposed to get that money; now, the IRS wanted it back.
The IRS says Sotelo was the victim in 2009 and 2010 of tax preparer fraud, a widespread scam that can leave innocent taxpayers with a mountain of debt and put them in the crosshairs of the IRS. In this type of fraud, a tax preparer creates big refunds by lying on the tax return, giving both the preparer and taxpayer a nice payday. But when the IRS comes knocking, it's the taxpayer who's on the hook.
"There's this huge refund that goes out the door that the taxpayer is clearly not entitled to, but they don't know that," said Caroline Chen, assistant clinical professor of law and director of the Low-Income Taxpayer Clinic at Santa Clara University. "They find out later, after the money, of course, is spent."
The cumbersome tax code, insufficient regulations and under-resourced enforcement agencies have helped create a breeding ground for tax preparer fraud, experts said. Even in California, a state with some of the toughest oversight, there are up to 5,000 tax preparers practicing illegally, possibly hundreds in the Bay Area alone, according to estimates from the California Tax Education Council. Each year, they strike, leaving their frequent victims, low-income and immigrant taxpayers, in financial ruin.
"There's a lot of people who prepare tax returns who are not qualified," said Special Agent Arlette Lee of the IRS Criminal Investigations for Northern California. "Tax return preparers may be doing this, and the taxpayer has no idea."
The fraud happens in a few different ways. In some cases, the preparer lies on the tax return, fabricating deductions such as charitable contributions, property taxes and business expenses. The taxpayer often doesn't know the preparer is lying on the return or is tricked. The fictitious deductions inflate the amount of the refund, and the preparer demands a generous percentage -- a billing system the IRS says is illegal.
"These preparers get paid and then they disappear," said David Freeman, a third-year law student at Santa Clara University who helps at the tax clinic. "And then the clients show up a couple years later to us."
Tax refunds are paid automatically and immediately, and the IRS has up to three years after the refund to audit, Chen said.
Sotelo, a truck driver and father of four from Livingston, in Merced County, already had several notices from the IRS by the time he went to the SCU tax clinic last year. His preparer, Sarad Chand, who operated S. Chand Tax & Accounting Service in Ripon, had told him to ignore the letters, Sotelo said.
"I felt bad in the beginning. I had to pay so much money," Sotelo said in Spanish. "I didn't understand why."
Chand was charged in December with 10 counts of falsifying tax returns as part of a multimillion-dollar fraud scheme. He pleaded not guilty and was released on a $100,000 bond. His clients have to pay thousands of dollars back to the IRS.
"They are ultimately responsible for the information listed on the tax return -- no matter if it is right, wrong or even fraudulent," said Gigi Campo, spokeswoman for the California Tax Education Council, a nonprofit created by the state legislature to oversee tax preparer education and compliance. "The damage those tax preparers committed on the tax return is still the consumer's problem to deal with."
That damage can be devastating, because scheming preparers target the most vulnerable -- poor and non-English speaking communities.
"They are attractive to people who don't like bureaucracy," Freeman said. "To them, H&R Block probably looks like a DMV."
But the taxpayer has to take some responsibility, said Randy Warshawsky, an IRS enrolled tax agent at The Tax Man in San Jose. They need do their homework to find a reputable preparer. With at least 41,000 certified tax preparers in the state, there are options.
"It's your responsibility to sign the tax return and to make sure what's being reported is correct," he said.
Campo said the number of illegal preparers -- those working outside state laws -- has dropped by half since 2005, when the Franchise Tax Board began enforcing tax preparer requirements. California has some of the toughest regulations in the country, and requires that tax preparers who charge a fee must be either an attorney, a CPA, an IRS enrolled agent or a registered tax preparer with the Tax Education Council.
Still, Campo said, illegal preparers are always going to be a problem. Just last year, the Franchise Tax Board fined 122 tax preparers for practicing without the proper licenses.
"You'll always have those questionable people out there," she said.
Contact Heather Somerville at 925-977-8418. Follow her at Twitter.com/heathersomervil.
Do your homework. Make sure they have the Preparer Tax Identification Number required by the IRS, check their history with the Better Business Bureau and ask about any disciplinary actions.
Check your preparer's work to make sure it is accurate.
Sign your tax return, and make sure your preparer signs it and includes the identification number. Never sign a blank or incomplete form.
Keep a copy of your tax return.
Don't use preparers who charge a percentage of your refund.
Stay away from preparers who advertise that they can get you bigger refunds than their competitors.
Make sure your bank account number -- not the preparer's -- is on the return to receive the entire refund.
Ask for an e-file.
Report fraudulent tax preparers at www.irs.gov or call 800-829-3676.
Sources: National Taxpayer Advocate Service, IRS, California Franchise Tax Board
finding tax return preparers
Find licensed and registered tax return preparers in California at:
California Board of Accountancy: dca.ca.gov/cba
California Society of Certified Public Accountants: calcpa.org
State Bar of California: calbar.ca.gov
California Society of Enrolled Agents: csea.org
California Tax Education Council: ctec.org
Sources: California Franchise Tax Board, California Tax Education Council
free tax help
Free tax return assistance is available to some taxpayers:
Santa Clara University Low-Income Tax Clinic, open Wednesday evenings at the Katharine & George Alexander Community Law Center, at 1030 The Alameda, San Jose. Call 408-288-7030.
Volunteer Income Tax Assistance clinics offer free tax preparation across the Bay Area. Find a site at irs.treasury.gov/freetaxprep/
Source: SCU Low-Income Tax Clinic