Tax preparer horror stories

dishonest tax preparers
Some tax preparers are behaving badly due to a lack of regulations, consumer groups say.

From reporting bogus children to stealing clients' identities, many tax preparers are behaving badly.

In most states, there are no competency requirements governing tax preparers and that is resulting in careless mistakes and outright fraud, a recent report from the National Consumer Law Center found.

The IRS proposed a crackdown in 2011, but a district court blocked the proposal and an appeal of that decision was rejected last week.

Related: How to lower your tax bill

As the taxpayer, you're the one who will pay the price if you end up with a bad preparer -- facing fines or even criminal action if you sign off on a fraudulent tax return filed under your name.

"In [46] states, there are more regulatory requirements for hairdressers than tax preparers. Yet the impact of a bad haircut is far less damaging than an inaccurate tax return," the NCLC states.

Here are some of the most egregious offenses, dug up from criminal cases last year.

Inventing bogus children: Making up fake children is a surprisingly common way shady tax preparers boost refunds for clients. One recent example: A Brooklyn, N.Y., tax preparer was sentenced to 14 months in prison and charged with $69,799 in restitution after allegedly listing fake dependents and Social Security numbers on tax returns to lower his clients' tax liabilities and get them bigger refunds.

Over the course of four years, the preparer allegedly got his hands on $74,000 in fraudulent refunds.

Biggest tax changes you'll see in 2014
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Filing secret returns to the IRS: A tax preparer from Essex County, N.J., filled out two versions of returns for many of his clients: The first version was fraudulent, claiming bogus deductions like medical and dental expenses, which he would show to the client. But then, he would fill out another fraudulent tax return claiming even bigger refunds, and send that one to the IRS instead.

Related: Most Americans plan to save their refunds

While it's unclear whether the preparer personally benefited from this fraud, it's common for untrustworthy preparers to charge a fee based on the size of a client's refund or even request that the refunds are deposited into their own accounts.

The IRS ended up paying out $168,424 in fraudulent refunds over the course of the scheme. The preparer pleaded guilty to the charge and was sentenced to 18 months in prison and was ordered to pay a $5,000 fine and $168,424 in restitution to the IRS.

Fleeing to Mexico: After allegedly preparing thousands of fraudulent tax returns, resulting in more than $7 million in refunds for his clients, a preparer from Burbank, Calif., fled to Mexico to avoid being caught. He was living as a fugitive up until he got arrested in March. He was sentenced to 37 months in prison and ordered to pay a $50,000 fine.

Stealing client identities: A manager at a tax preparation firm in Van Nuys, Calif., allegedly made a habit of stealing the identities of clients in the store's database and using them to file fake returns and claim big refunds.

The manager allegedly had $48,593 in refunds deposited onto a prepaid card. He was caught by authorities with pantyhose over his face (to conceal his identity) as he used the card at an ATM. The man was sentenced to a year and one day in prison and was ordered to pay a $200 fine.

Forging customer signatures: Late last year, a federal court in Ohio accused a large tax preparation company of filing tax returns without getting approval from clients and understating income, among other charges. But possibly the most egregious offense: forging checks from their customers in order to run the tax business, and hiding that extra money in a secret account.

Related: Obama wants to curb retirement tax breaks for rich

The illegal actions of this company and its franchisees cost the IRS between $10 million and $25 million in a single filing season, and an Ohio district court shut down the business permanently in November.

Hiding millions in Israeli banks: To hide offshore income for their clients, two tax preparers not only failed to report the money, but they allegedly helped their customers set up secret offshore bank accounts at the Luxemburg locations of two Israeli banks, according to the Department of Justice and the IRS. If convicted on the two counts of fraud they are charged with, each of the preparers could spend up to 10 years in prison and face a fine of up to $500,000.

Don't be duped

Steer clear of any tax preparer who charges fees based on the size of your refund and never let a preparer ask for the refund to be deposited to their account rather than sent straight to you.

Also, be skeptical if a preparer promises you a return that seems too good to be true, and check the Better Business Bureau's site to find out their license status and whether they've had any disciplinary actions taken against them.

And of course, never sign a blank return that a preparer says they will fill out later, and make sure your preparer signs your return before submitting it to the IRS.

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