A bipartisan group of lawmakers have introduced legislation that would increase the penalties on tax preparers who defraud taxpayers and the Internal Revenue Service by altering tax returns for personal benefit without their clients’ knowledge.

The bill, known as the “Fighting Tax Fraud Act,”  was introduced Tuesday by Rep. Erik Paulsen, R-Minn., who joined fellow members of the House Ways and Means Committee, Chairman Charles Boustany, R-La., ranking Democratic member John Lewis, D-Ga., and ranking member Jim McDermott, D-Wash., in sponsoring the bill. Paulsen referred to the bill during a subcommittee hearing devoted to identity theft and tax fraud (see IRS and Social Security Urged to Curb Tax Fraud and Identity Theft).

The bill would essentially double the current penalties for tax preparers who are involved with identity theft, with the goal of giving the IRS greater incentive to prosecute this type of theft. The legislation came from a recommendation from National Taxpayer Advocate Nina Olson.

“Taxpayers put good faith in the tax preparers who they hire to file their annual forms,” Paulsen said in a statement. “If a preparer willfully commits fraud against their client, and ultimately the government, they should be held responsible. This is a common-sense, good government measure that will cut down on the amount of waste, fraud and abuse in the federal tax system. I look forward to seeing this legislation move through the Ways & Means Committee and enacted into law.”

Paulsen hosted a seminar for senior citizens last week in Minnesota to give them advice on how to protect themselves against identity theft. He said in the hearing that it was a packed house. He also has co-sponsored legislation with Rep. Sam Johnson, R-Texas, to remove the Social Security number from Medicare ID cards as a way of protecting seniors against identity theft.

“Taxpayers who are defrauded by their tax preparers should not be left holding the bag,” said Lewis.  “Today we are sending a strong message to tax preparers who defraud innocent taxpayers that the federal government will not tolerate fraud. This bill ensures that errant preparers will be met with increased penalties and heightened IRS enforcement. I am pleased that members of the Ways and Means Committee worked in a bipartisan fashion on this occasion to crack down on tax fraud.”

Olson pointed out during the hearing that it was necessary to increase the preparer penalties in order to obtain restitution.

“The IRS has seen many more of these schemes coming in involving return preparers that are filing tax returns after the taxpayer has approved the return,” said Olson. “They [the taxpayers] actually have a copy of what they think is going to be filed. The preparer alters the return in some way and then uses the split refund procedure to get the difference in the additional refund deposited into their account. The taxpayer doesn’t find out about this until much later. They get the refund that they are expecting, and it’s only when the IRS comes out trying to collect this erroneous refund from the taxpayer that they find out the return has been altered. We learned that to go after the preparer, you have some very low-dollar civil penalties that are really about negligence, and then you have a very expensive route to try to build a case to get to the Department of Justice to get restitution for the dollars that are lost to the public fisc. What we tried to propose was some kind of civil penalty that would really serve as restitution, that you could build the case that the preparer had in fact committed this act that was willful and fraudulent, and then the preparer would be 100 percent liable for the amount that was erroneously taken out. So it fills a gap in our ability to be able to recover what the public fisc is out, and it also heightens the risk to the preparer in engaging in this activity."

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