Warning: Your Hairdresser Is More Regulated Than Your Tax Preparer

Female hairdresser adjusting curlers in a mid adult woman's hair
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A recent Consumerist article points out the shocking fact that hairdressers (along with most other service professionals) are more heavily regulated than the people you may hire to prepare your taxes. In fact, only three states (California, Maryland, and Oregon) have any laws whatsoever mentioning necessary qualifications.

With tax season swiftly approaching, it's important to understand what you should look for in a tax professional, whom to avoid, and the signs that should send you running for the hills.

After all, you are legally responsible for the information on your tax return -- whether you pay someone else to prepare it or not. So even though getting an outsider's assistance may give you some peace of mind, it could ultimately be the cause of an even worse headache down the road.

How Regulation Bypassed Tax Preparers

In the state of New York, cosmetologists must complete a 1,000-hour course and then pass a state-administered written and practical exam. Virginia has a similar process -- and the regulations involved run to 18 pages of legalese.

Even Alaska, the least densely populated state, has a 23-page document establishing requirements for social workers, geologists, and big-game outfitters. But absolutely no mention is given to tax preparers.

%VIRTUAL-article-sponsoredlinks%Although the IRS might be a tempting target to blame these lapses on, they're not the IRS' fault. Service jobs are regulated at the state level. The IRS does require preparers to obtain a preparer tax identifier number, or PTIN. But there are no competency requirements involved.

In 2011, the IRS tried to change this, hoping to begin regulating non-attorney and non-CPA tax preparers. But lawyers quickly moved to quash the attempt, arguing that Congress never gave the IRS authority to regulate tax preparers.

Though that may be true (a decision has not yet been reached by the U.S. Court of Appeals that's currently reviewing the case), just consider the number of Americans who shell out for help in preparing their paperwork. In 2011, nearly 80 million Americans paid about $10 billion to have someone prepare their taxes. It's clearly a big deal that there are so few regulations on these preparers, nor are there major ramifications if they make a serious mistake. And those mistakes ultimately could cost you money.

This is even more troubling when you consider that an official government investigation into this issue in 2006 -- managed by the Government Accountability Office -- involved having returns prepared at 19 tax chain outlets. It discovered that "all 19 returns had mistakes ranging from refund overclaims of nearly $2,000 to underclaims of over $1,700."

Whom Can You Turn To?

The best tax preparers to seek assistance from are certified public accountants or tax attorneys -- heavily educated (and regulated) professionals who must meet strict requirements for initial certification. They are also required to receive ongoing education in order to maintain their certification.

Of course, expertise comes at a cost, which makes hiring CPAs and tax attorneys too expensive for a lot of people.

For those on who make $52,000 or less annually, the IRS offers completely free tax preparation through its Volunteer Income Tax Assistance, or VITA, program. These agents are trained and IRS-certified, so they are similarly trustworthy.

Then comes the vast middle ground into which most people fall.

Tax preparers at national chains like H&R Block (HRB) and Jackson Hewitt go through minimal training (the equivalent of 2.25 and 3.5 college credit hours, respectively). That's better than nothing, of course. But even so, a quick Web search will return reams of horror stories from folks left with stiff penalties due to careless mistakes made by tax prep agents. So proceed with caution -- and use them at your own risk.

Of course, outside of the big chains, there are many, many tax preparers. And when it comes to those, you're on your own. Some may indeed be knowledgeable and helpful, but others might not be looking out for your best interests.

How to Vet a Tax Preparer

Heed the IRS' advice and keep these things in mind when determining whether or not a prospective preparer is suitable to use:

1. Ask for their preparer tax identification number (PTIN). As mentioned earlier, the IRS requires tax preparers to apply for this number. So if yours can't provide you with his number, it's probably because he doesn't have one. Meaning you should stay far, far away.

2.Do your research. Don't rely solely on a family member's or friend's recommendation. Google the tax preparer's name. Check the Better Business Bureau to see if there's a history of complaints. Obviously, if the preparer's name is attached to a long list of disgruntled clients, keep looking.

3. Beware of big promises, and consider how the preparer is paid. A preparer who guarantees they'll send you home with the biggest refund in town (especially before they've even examined your documentation) is probably willing to fudge a little on your return to fulfill that promise. The same goes for a preparer who doesn't charge a flat rate -- but rather charges a percentage of the return he secures. These are two common, but easily avoidable, red flags. Don't be lured by big refunds -- and seek out flat-rate tax preparers.

4. Never sign anything until you've completely reviewed it. It may take some extra time, but review every number that your tax preparer has prepared. Ask questions if something doesn't make sense. A good tax preparer is willing to explain what they've calculated and why. Remember, even though your preparer is required to sign the return and list their PTIN, all responsibility for the accuracy of your return falls on you. So make sure all the t's have been crossed and the i's dotted -- and never sign until you've verified your return.

IRS warns of 'dirty dozen' tax scams
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Warning: Your Hairdresser Is More Regulated Than Your Tax Preparer
Identity thieves are increasingly getting hold of taxpayers' names, Social Security numbers, birth dates and other information, then fraudulently claiming tax refunds in their names.

In response, the IRS has been updating its fraud screening systems and penalizing more identity thieves. Last year, the agency stopped $20 billion in fraudulent refunds from being issued -- up from $14 billion in 2011. And earlier this year, it launched a nationwide crackdown that brought enforcement actions against 389 identity theft suspects in 32 states. The IRS has also more than doubled its staff devoted to identity theft cases.

If you get a notice from the agency that more than one return has been filed under your name, it may mean your identity has been compromised. If you suspect that's the case, contact the IRS Identity Protection Specialized Unit at 1-800-908-4490. And if you are in fact a victim, expect a longer wait for your refund.

Have you received an e-mail that appears to be from the IRS? It's probably not. Instead, it could be from a scammer who will try to use any information you reply with to steal your identity and money. The IRS does not use e-mail, texts or social media to contact taxpayers for personal or financial information, so relay any such messages to phishing@irs.gov.

When choosing a preparer, make sure he or she has an IRS Preparer Tax Identification Number (PTIN). If a preparer doesn't put this number on your tax return as required, or fails to sign the form, that should raise a red flag. And watch out for preparers who base fees on the size of your refund or promise refunds that sound too good to be true.

Complaints about shady tax preparers can be submitted via Form 14157.

The IRS has been cracking down on taxpayers illegally hiding income abroad. Launched in 2009, the agency's voluntary disclosure program has already raked in $5.5 billion in back taxes, interest and penalties from tax cheats for illegally hiding assets in offshore accounts.

If you have a legitimate account abroad, you won't get in trouble if you properly complete the reporting requirements. But by failing to disclose assets held in offshore accounts, you risk huge penalties -- including a fine of $100,000 or 50% of the account balance, whichever amount is greater.
Be skeptical of flyers and advertisements promising you "free money" from the IRS. Scammers have been targeting low-income and elderly people, often through community churches, convincing them to claim credits they aren't entitled to -- and even Social Security rebates that don't exist.

These con artists often charge up-front fees and disappear without a trace before the claims are rejected by the IRS. And along with losing whatever they gave the scammer, victims could also end up owing the IRS a hefty $5,000 penalty for making intentional errors on their return.
In the wake of disasters like Superstorm Sandy, scammers come out of the woodwork and solicit donations for bogus charities. Some will even impersonate the IRS and contact disaster victims, claiming to be able to help them file casualty loss claims or obtain refunds. Others will steal victims' identities by asking for Social Security numbers and personal information.

Before giving money to a charity, verify that the organization is legitimate and that your donations will be tax deductible by using the IRS's Exempt Organizations Select Check. And don't give cash -- use a check or credit card instead so you'll have proof of payment.
Reporting higher income or expenses so that you qualify for bigger refundable credits may sound tempting, but doing this can get you in big trouble with the IRS. If you get caught, you'll have to return any refund you fraudulently received and pay interest and penalties on any amount owed.
If someone tries to convince you to file a 1099-OID to claim money the federal government is allegedly holding in a secret account for U.S. citizens, don't fall for it. The IRS says this is a common scam -- and not only will you not receive a refund, you could face big fines and even jail time.
Claiming that filing a tax return is voluntary, that only gold-based money is taxable, or that your state isn't part of the United States won't get you out of paying your taxes. These are considered frivolous arguments and will be swiftly rejected.
Taxpayers who fall prey to schemes convincing them to file Form 4852 (a substitute W-2 form) or a corrected Form 1099 in order to falsely reduce their taxable income to zero could face a penalty of $5,000.
The IRS is on the lookout for firms hiding their true identities by using third parties or forming corporations to make it harder for the IRS to figure out who is the true owner. By creating such entities, some businesses underreport income, fail to file tax returns, claim bogus deductions and even launder money.
Schemes recommending that you transfer money into trusts to reduce your income and avoid paying taxes are common, and the IRS has seen a growing number of people improperly stashing money in private annuity and foreign trusts. To avoid getting caught up in an illegal trust arrangement, the IRS recommends consulting with a tax professional.

Motley Fool contributing writer Adam Wiederman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days.

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