You Need a Professional Tax Preparer

Lawyers who handle personal injury cases are required by the IRS to give the IRS and the client who received settlement money a tax form indicating how much was received. While most of lawyers who handle this sort of work do not handle tax matters, we are aware that the law is supposed to be that the money is not taxed as income. If our client goes to a tax preparer who does not understand how this works, the return can be filed incorrectly resulting in time and effort by both the client and the lawyer to resolve the tax consequences.

Impact Alabama, a Birmingham, Alabama based non-profit organization that helps low-income Alabama residents sent undercover staff with recording devices to 13 seasonal tax preparers across the state and found that none of them correctly prepared tax returns. The offices visited ranged from independent storefront operations to national chains. The public needs to be wary of these operations.

This type of unprofessional practice hurts the poor and can affect you. Find tax preparers who not have enrolled agents who have passed an IRS test and stay away from organizations that use un-enrolled tax preparers. I had a client who was awarded personal injury money in medical malpractice case and reported it to the IRS through one of these seasonal tax preparers who did not properly note that it was personal injury proceeds. He was taxed on the money. After numerous telephone calls to the preparer and writing three letters on his behalf to the IRS, he finally received the proper adjustment. However, he died before it was resolved and his estate had to deal with the problem.

Impact Alabama is a student service organization which trains college students to prepare tax returns for low-income, working families for free. With more than 350 students in 16 locations across the state, it is giving the poor an opportunity to have their tax returns prepared correctly and not to be subject to unprofessional service companies who overcharge and often incorrectly prepare returns.

“The undercover review revealed that many commercial tax preparation companies confuse and abuse their customers with poor disclosures, high fees and costly miscalculations,” Stephen Black, president of Impact Alabama, said Thursday.

Impact Alabama staff members used their W-2 tax forms and described themselves as parents with one or two children who lived with them less than six months of the year. For parents to claim the Earned Income Tax Credit, they must have a child more than half the year. While this may allow the parent to receive a refund, the deduction is incorrect and can result in the taxpayer assessed penalties and interest if an audit reveals that the assertion of having the children six months is untrue.

All 13 preparers computed that the ‘parent’ would get refunds ranging from $65 to $6,247 when in reality they each owed $112. That does more than cheat the government, Black said. It can cause the other parent, who is rightfully entitled to the credit, to have a tax return held up for months until they can verify the children’s residence, he said. Then the parent who wrongly filed may be assessed the penalties and interest discussed above, resulting in even more trouble for them.

Thanks to Impact Alabama for doing the study and letting us all know of the potential problems that exists. This is just one example of what can happen if a tax return is not done professionally. Please find a tax preparer who knows what they are doing- like a CPA, an enrolled agent who has passed the IRS test or a lawyer who does tax work.