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Beware the Red Flags: How to Spot Tax Preparation Scams and Avoid Risky Tax Schemes

Updated: Jun 5

Learn how to spot red flags in tax preparation services and avoid IRS-flagged tax schemes. Discover warning signs of fraud, abusive promotions, and how to protect yourself with expert guidance.




Why You Should Be Cautious About Who Prepares Your Taxes

Tax season brings more than just deadlines—it opens the door to fraudsters, dishonest preparers, and too-good-to-be-true tax schemes. While most tax professionals follow the law, some exploit taxpayers through deceptive practices, inflated refunds, or fraudulent deductions. Knowing the red flags in tax preparation can protect your finances and help you avoid IRS scrutiny.



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Top Red Flags in Tax Preparation Services


Promises of Huge Refunds Without Reviewing Your Records

If a tax preparer guarantees a refund before reviewing your documents, that’s a major warning sign. Ethical preparers make no promises until they fully understand your tax situation.


Fees Based on a Percentage of Your Refund

Reputable tax professionals charge flat fees or hourly rates—not a cut of your refund. Preparers who profit more from exaggerated refunds have an incentive to inflate numbers, putting you at risk.


Failure to Sign the Return as a Paid Preparer

Anyone paid to prepare tax returns must sign the return and include their Preparer Tax Identification Number (PTIN). If they refuse or try to file anonymously, walk away.


Asking You to Sign a Blank or Incomplete Return

Never sign anything you haven’t reviewed. If someone asks you to sign a blank return or 'just trust them,' it’s a setup for fraud—and the IRS will hold you accountable.


Claiming Fake Deductions or Credits

Fraudulent preparers may invent dependents, manipulate income, or fabricate deductions to maximize your refund. This can trigger audits, penalties, and criminal charges—especially with refundable credits like the EITC or CTC.


Watch Out for These Common Tax Schemes

 

Abusive Trust Arrangements

Schemes that promise tax savings by placing income or assets in 'trusts' often mislead taxpayers about legality. These arrangements may disguise ownership or control, violating IRS rules.Learn more: https://www.irs.gov/compliance/abusive-trust-tax-evasion-schemes


Charitable Remainder Trust (CRT) Misuse

While CRTs can be legitimate, scammers use them to falsely claim large tax deductions while maintaining control over assets.


Offshore Accounts and Hidden Income

Promoters may suggest hiding income in foreign accounts to avoid U.S. taxes. Not only is this illegal, but failing to report foreign assets can lead to severe penalties. More info: https://www.fincen.gov/report-foreign-bank-and-financial-accounts


Employee Retention Credit (ERC) Mills

ERC mills are aggressive promoters who target small businesses, falsely claiming eligibility for refundable credits. Many taxpayers have been misled into filing improper claims and are now facing IRS enforcement.More info: https://www.irs.gov/newsroom/irs-alerts-businesses-about-aggressive-employee-retention-credit-marketers


How to Protect Yourself from Tax Fraud

Use only credentialed tax professionals: CPAs, Enrolled Agents (EAs), or former IRS professionals- Ask for their PTIN and verify it through the IRS Directory of Preparers- Review your return carefully before signing- Keep copies of all documents and correspondence- Be wary of pressure tactics or 'limited-time offers'


When in Doubt, Choose Experience

At ExFed Tax, LLC, we’ve seen it all—from bogus trust schemes to fraudulently filed returns. As former IRS professionals, we help clients correct past filings, avoid audits, and stay compliant while maximizing legal deductions.


Need a Tax Second Opinion?

If something feels off about your tax return or a preparer’s advice, don’t ignore your instincts. Contact ExFed Tax for a confidential review before it becomes an IRS problem.


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