Tax Preparer Fraud and Accountant Fraud: Understanding Your Rights When Your Tax Professional Commits Fraud

When tax preparers or accountants commit fraud, their clients are typically victims, not criminals. The IRS and Department of Justice focus their prosecutions on the fraudulent tax professionals, not the clients who trusted them. However, clients who unknowingly sign false returns may face civil penalties, though criminal prosecution is rare for non-willful conduct.

What is Tax Preparer Fraud?

Tax preparer fraud occurs when a tax professional (including CPAs, enrolled agents, or unlicensed preparers) commits fraud while preparing tax returns for clients. This can include:

• Filing false returns with inflated deductions or credits
• Claiming fake dependents or business expenses
• Stealing client refunds
• Using client information to file fraudulent returns
• Embezzling client funds intended for tax payments

These schemes can defraud clients of millions of dollars. In 2025, a Montana accountant was sentenced for a $1.3 million fraud scheme that defrauded multiple clients through false returns. The clients were victims and were reimbursed by the IRS. In another 2025 case, a Franklin CPA received a nine-year prison sentence for stealing client funds and committing tax fraud—again, the clients were not charged.

How Tax Preparer Fraud Works

Fraudulent tax preparers use various schemes to defraud clients and the IRS:

Inflated Deductions and Credits

Dishonest preparers may:

• Claim false business expenses on Schedule C
• Inflate charitable contributions
• Claim fake dependents
• Fabricate education credits or earned income tax credits
• Overstate itemized deductions

These false claims increase refunds, which the preparer may then steal or use to justify higher preparation fees.

Stealing Client Refunds

Some fraudulent preparers:

• Direct refunds to bank accounts they control
• Use client information to file returns and claim refunds without the client's knowledge
• Charge excessive fees that consume most or all of the refund
• Forge client signatures on refund checks

Embezzling Client Funds

Accountants who handle client tax payments may:

• Steal funds clients provided to pay tax liabilities
• Use client money for personal expenses
• Fail to remit payroll taxes or estimated tax payments
• Misappropriate funds from trust accounts

Identity Theft

Some preparers use client information to:

• File fraudulent returns in the client's name
• Open credit accounts using client information
• Sell client Social Security numbers to identity thieves

Client Protections: You Are a Victim, Not a Criminal

The IRS and Department of Justice recognize that clients of fraudulent tax preparers are victims. Prosecutions focus on the preparers, not the clients.

Clients Are Not Prosecuted

In virtually all tax preparer fraud cases, clients are not charged with crimes, even if:

• They signed returns containing false information
• They received refunds based on fraudulent claims
• The preparer used their information without authorization

The key factor is whether the client knew about the fraud. If the client was unaware, they are considered a victim, not a co-conspirator.

IRS Reimburses Victims

When a tax preparer commits fraud, the IRS typically:

• Reverses fraudulent returns filed by the preparer
• Refunds any taxes the client paid on fraudulent returns
• Removes penalties and interest related to the fraud
• Allows clients to file corrected returns

In the Montana accountant case, clients who were defrauded received reimbursement from the IRS after the preparer's fraud was discovered.

No Criminal Liability for Unknowing Clients

Clients who unknowingly sign false returns are not criminally prosecuted. Criminal tax fraud requires willfulness—the intentional violation of a known legal duty. If a client:

• Relied on their tax preparer's expertise
• Did not know the return contained false information
• Signed the return in good faith

They lack the willfulness required for criminal prosecution.

When Clients Might Face Civil Penalties

While clients are rarely criminally prosecuted, they may face civil penalties in certain circumstances:

Accuracy-Related Penalties

If a client signs a return containing false information, they may face accuracy-related penalties under Section 6662, even if they didn't know about the fraud. However, these penalties can be avoided if the client can show:

• Reasonable Cause: The client had a reasonable basis for the position taken on the return
• Good Faith Reliance: The client relied in good faith on the tax preparer's advice
• Lack of Knowledge: The client did not know and had no reason to know about the false information

Failure to Review Returns

Clients have a duty to review their tax returns before signing. If a client:

• Signs a return without reviewing it
• Ignores obvious red flags (e.g., claiming dependents they don't have)
• Signs a blank return and allows the preparer to fill it in later

They may face civil penalties even if they didn't know about specific false items.

Willful Blindness

If a client deliberately avoids learning about false information on their return, they may be found to have acted willfully, potentially exposing them to:

• Civil fraud penalties (75% of the underpayment)
• Criminal prosecution (though this is rare for clients)

Real-World Examples

Montana Accountant Case (2025)

A Montana accountant was sentenced in 2025 for a $1.3 million fraud scheme that defrauded multiple clients. The accountant:

• Filed false returns with inflated deductions
• Claimed fake business expenses and dependents
• Directed client refunds to accounts he controlled

Client Outcome: The clients were identified as victims. The IRS reversed the fraudulent returns, removed erroneous tax assessments, and reimbursed clients for any taxes they paid on the fraudulent returns. No clients were charged with crimes.

Franklin CPA Case (2025)

A Franklin CPA received a nine-year prison sentence in 2025 for:

• Stealing client funds intended for tax payments
• Filing fraudulent returns on behalf of clients
• Embezzling money from client trust accounts

Client Outcome: The clients were not charged. The IRS worked with clients to correct their returns and resolve any tax issues caused by the CPA's fraud. The CPA was ordered to pay restitution to his victims.

What to Do If Your Tax Preparer Commits Fraud

If you discover your tax preparer has committed fraud, take these steps immediately:

1. Stop Using the Preparer

Immediately cease all contact with the fraudulent preparer. Do not allow them to file any additional returns or handle any tax matters.

2. Review Your Returns

Obtain copies of all returns the preparer filed on your behalf. Review them for:

• False deductions or credits
• Unfamiliar dependents
• Business expenses you didn't incur
• Income you didn't receive

3. File Corrected Returns

File amended returns (Form 1040-X) for any years with false information. You should:

• Correct all false items
• Pay any additional tax owed (or claim refunds if you overpaid)
• Attach a statement explaining that the errors were due to preparer fraud

4. Report the Fraud

Report the fraudulent preparer to:

• IRS: Use Form 14157, Complaint: Tax Return Preparer, or call 1-800-829-3676
• State Licensing Board: If the preparer is a CPA or enrolled agent, report them to the appropriate state board
• Local Police: File a police report if the preparer stole money or committed identity theft

5. Contact the IRS

Call the IRS at 1-800-829-1040 to:

• Explain that your returns contained false information due to preparer fraud
• Request that penalties be abated
• Ensure your account is properly marked to reflect the fraud

6. Seek Professional Help

Consider hiring a new, reputable tax professional or tax attorney to:

• Review your returns for additional fraud
• Help file corrected returns
• Communicate with the IRS on your behalf
• Ensure you receive all appropriate refunds or abatements

How to Choose a Reputable Tax Preparer

To avoid becoming a victim of tax preparer fraud:

Check Credentials

Verify that your preparer has appropriate credentials:

• CPA: Certified Public Accountant licensed by your state
• Enrolled Agent: Licensed by the IRS to represent taxpayers
• Attorney: Licensed attorney with tax expertise

You can verify credentials through state licensing boards or the IRS directory of tax return preparers.

Avoid Red Flags

Be wary of preparers who:

• Promise unusually large refunds
• Charge fees based on a percentage of your refund
• Ask you to sign a blank return
• Refuse to sign your return as the preparer
• Don't provide you with a copy of your return
• Direct refunds to their own bank account
• Claim they can get you deductions or credits you've never heard of

Review Your Return

Always review your return before signing:

• Verify all income is reported correctly
• Check that deductions and credits are legitimate
• Ensure your name, Social Security number, and address are correct
• Question any items you don't understand

Get Everything in Writing

A reputable preparer will:

• Provide a written engagement letter
• Explain their fees upfront
• Give you a copy of your return
• Sign the return as the preparer

Civil Penalties vs. Criminal Prosecution

Civil Penalties

Clients who unknowingly sign false returns may face:

• Accuracy-Related Penalty: 20% of the underpayment (if due to negligence or substantial understatement)
• Civil Fraud Penalty: 75% of the underpayment (only if the client acted willfully)

However, these penalties can often be abated if the client can show reasonable cause and good faith reliance on the preparer.

Criminal Prosecution

Criminal prosecution of clients is extremely rare and typically only occurs if:

• The client knew about the fraud and participated willingly
• The client directed the preparer to commit fraud
• The client received a substantial benefit and knew it was fraudulent

Even in these cases, prosecutors often focus on the preparer rather than pursuing clients.

Forms and Resources

• Form 14157 - Complaint: Tax Return Preparer
• Form 14157-A - Complaint: Tax Return Preparer (for tax-related identity theft)
• IRS Directory of Federal Tax Return Preparers - Verify preparer credentials
• IRS Tax Preparer Fraud Information - Learn about common preparer fraud schemes

Conclusion

Tax preparer fraud is a serious crime that victimizes clients and defrauds the government. However, clients of fraudulent preparers are protected: they are victims, not criminals. The IRS and Department of Justice focus prosecutions on the fraudulent preparers, and clients typically receive reimbursement for any losses.

If you discover your tax preparer has committed fraud, act quickly: stop using the preparer, review your returns, file corrected returns, and report the fraud to the IRS. While you may face civil penalties if you unknowingly signed false returns, these penalties can often be abated, and criminal prosecution of innocent clients is extremely rare.

The key takeaway: If you relied in good faith on your tax preparer and didn't know about the fraud, you are a victim, not a criminal. The IRS will work with you to correct your returns and resolve any tax issues caused by the preparer's fraud.