Congressional investigators are taking aim at incompetent and fraudulent activity by the nation's tax return preparers - a problem that they say is adversely affecting millions of U.S. taxpayers.

In scheduling a new round of Capitol Hill hearings on those concerns, House Ways and Means Oversight Subcommittee chair Jim Ramstad, R-Minn., said that while "most tax preparers are honest ... there is a troubling and persistent occurrence of tax fraud by unscrupulous preparers who take advantage of taxpayers."

Among the specific examples of malfeasance by tax professionals cited:

* A New Jersey tax preparation professional prepared 13,000 returns in 2001 and 2002 and was caught on tape advising an undercover agent to include phony expenses on his tax return in order to qualify for a tax refund.

* A group of tax preparers in Minnesota victimized thousands of low-income Somali immigrants by creating fictitious businesses and claiming improper fuel tax credits in order to qualify for refunds. "In addition to prosecuting the preparers, the Internal Revenue Service has commenced scores of taxpayer audits and will eventually audit nearly all of the victims," officials said.

* A Long Beach, Calif., tax preparer is being prosecuted for generating hundreds of false returns claiming improper Earned Income Tax Credit refunds for Cambodian immigrants. According to congressional investigators, "The preparer allegedly used the proceeds from his tax preparation service to fund an armed insurgency in Cambodia."

The subcommittee's concerns over tax return preparation fraud were sparked in part by the growing trend among U.S. taxpayers to turn over tax preparation chores to accountants, attorneys, enrolled agents and commercial return preparation services.

Investigators at the U.S. Government Accountability Office reported that more than 70 million of the 131 million tax returns filed last year were prepared by tax professionals.

"Because of the increasing complexity of the law, taxpayers place a high degree of reliance on tax professionals, and due to this increasing reliance, tax professionals have become the guardians and distributors of billions of dollars in tax refunds and refundable credits," congressional officials said.

That view was underscored by a recent GAO report concluding that many taxpayers "would have great difficulty filing their own tax forms, because they do not understand their filing requirements."

Although most taxpayers surveyed by the GAO said that they believed they benefited from the services of a tax preparation professional, there is reason to believe that millions of Americans "are poorly served" by tax return preparers.

Noting that the use of a tax professional "may not assure that taxpayers pay the least amount due," the GAO suggested that part of the problem is incompetence. During one recent filing season, "as many as two million taxpayers overpaid" their income taxes "by $945 million because they failed to itemize deductions, and half of those used preparers," the agency said.

While the overall proportion of taxpayers victimized by fraudulent or incompetent preparers does not appear to be large, the GAO said that "even a small percentage of the over 72 million taxpayers who used paid preparers in 2001 translates into millions of taxpayers who are potentially adversely affected."

Although the IRS's new Office of Professional Responsibility is beginning to address these problems, the GAO noted that elderly and low-income taxpayers continue to be especially vulnerable to incompetent or corrupt tax preparers.

Among the examples cited by GAO investigators:

* A taxpayer overpaid his taxes over a period of years by roughly $3,500 to $5,000, despite receiving notices for several years from the IRS stating that he might be eligible for the EITC. Each year, he took the notices to his preparer, but the preparer took no action.

* One preparer told his elderly client to provide him with the checks to make her quarterly estimated payments. Instead of turning the money over to IRS, he kept it for himself. After receiving notices from the IRS, the taxpayer visited the paid preparer, who told her that the IRS must have made a mistake. The preparer was sent to jail.

* Another tax preparer incorrectly advised a married couple with two children to each file separately as head of household, so that they both could claim the EITC. The couple ended up owing taxes, interest and penalties.

* A paid preparer let a taxpayer file for the EITC for two years, although the taxpayer lacked the appropriate documentation and was ineligible for the credit. The taxpayer received a tax refund that he was not entitled to receive, resulting in a tax liability of $3,300.

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