Tax preparer fraud rarely ends with the preparer. It often triggers a chain reaction that lands on their client’s desk first: an IRS notice, a Franchise Tax Board (FTB) inquiry, a refund hold, a wage levy, or an interview request. Preparers who chase volume and fees sometimes “manufacture” outcomes by inventing deductions, inflating credits, fabricating Schedule C activity, or manipulating bookkeeping to reduce what’s owed and or produce a refund. The client may not understand what the preparer filed, especially when the preparer rushes signature pages, files electronically without real review, or operates as a “ghost preparer” who refuses to sign the return as the paid preparer. The government then treats the return as the client’s sworn submission and proceeds with the case on the premise that the client chose to file and benefited from the result. The fallout can escalate fast because fraudulent return patterns create criminal tax investigation risk, not just an “audit adjustment” problem. You sign a return under penalties of perjury, and deliberate false reporting can support an inference of willfulness, which matters because the IRS can refer a civil matter to IRS Criminal Tax Investigation when it develops firm indications of fraud or willfulness.
Why the IRS and California Can Hold You Responsible (Even if Your Preparer Lied)
The IRS states the rule plainly: even if someone else prepares your return, you remain ultimately responsible for the information on it. That responsibility drives most “client blame” outcomes. The IRS can assess additional tax, interest, and civil penalties against the taxpayer even when the preparer committed the misconduct. For example, the Internal Revenue Code imposes a 20 percent accuracy-related penalty on underpayments in certain circumstances, and a 75 percent civil fraud penalty on underpayments attributable to fraud. If the facts support criminal intent, federal prosecutors can also pursue criminal charges against the taxpayer for willfully signing and filing a materially false return, even when a preparer drafted it.
Clients often assume they can avoid exposure by arguing, “My preparer did it.” That argument can help in the right fact pattern, but it never works as a blanket defense. The government will ask what you knew, what you reviewed, what records you provided, what questions you asked, and whether you ignored obvious red flags. If you signed returns that reported income you never earned, businesses you never operated, deductions you never incurred, or credits you never qualified for, the government may treat that mismatch as evidence that you either knew the return contained falsehoods or consciously avoided the truth. In California matters, you also face separate state exposure because the FTB enforces California’s tax laws and investigates tax fraud and preparer fraud through its Criminal Investigation Bureau. A preparer-driven scheme can therefore create parallel federal and California state risk, especially when the same fabricated items appear on both returns.
You also need to understand confidentiality. Most communications with a tax return preparer do not carry attorney-client privilege. Even where a limited federal tax practitioner confidentiality statute applies to certain communications with federally authorized practitioners, it applies only to noncriminal IRS matters and noncriminal federal tax proceedings. It does not protect communications in criminal tax matters or in state tax matters. If you try to “explain” a fraudulent return to a preparer, you can create admissions that later become evidence. You should move carefully and treat every communication as evidence-in-the-making when you suspect preparer fraud.
Red Flags That Your Preparer Set You Up, and the Damage-Control Steps That Actually Help
Some preparer fraud leaves an obvious trail. The IRS warns taxpayers to avoid “ghost preparers” who refuse to sign returns and include their PTIN, then push the taxpayer to sign and file anyway. Other schemes hide in plain sight because the return looks “professional” while the numbers remain fictional. Red flags that commonly appear in preparer-driven fraud cases include: the preparer refuses to sign the return or provide a PTIN; the preparer promises a refund that seems disconnected from your real income; the preparer charges fees based on a percentage of the refund; the return suddenly shows a new Schedule C business, large cash income, or large “business” deductions you cannot substantiate; the preparer directs the refund to an account you do not control; or the preparer discourages you from reading the return before you sign it.
Once you suspect preparer fraud, you should focus on containment and documentation, not improvisation. Start by freezing the relationship with the preparer. Do not let the preparer “handle the audit” or speak to agents on your behalf when the preparer may have created the issue, because the preparer’s incentives can diverge from yours, and their statements can lock you into a bad narrative. Next, gather your full file: signed copies of federal and California returns, all schedules, all workpapers you can obtain, organizer questionnaires, invoices, engagement letters, emails, texts, portal messages, bank records, bookkeeping exports, and any documents you gave the preparer. Preserve everything exactly as it exists. Then, request IRS account transcripts and wage and income transcripts so you can compare what the IRS has on file with what the return reported. In parallel, consider whether you should file a preparer complaint with the IRS. The IRS uses a defined process for preparer misconduct complaints that may require Form 14157 and, when applicable, Form 14157-A (which you sign under penalties of perjury), signed under penalty of perjury, along with supporting documentation. You should not treat that step as routine when criminal tax exposure exists, because the affidavit and attachments can become evidence. A dual-licensed civil and criminal tax defense team should control the timing, content, and strategy for any submission.
How Preparer Fraud Escalates into a Criminal Tax Investigation, and How We Defuse it
Preparer fraud cases often escalate because they create patterns that enforcement teams can detect across many clients. The IRS has long focused on return preparer compliance and can pursue preparers through civil penalties, injunction actions that bar future preparation, and criminal referrals. When a preparer becomes the target, investigators often scrutinize the preparer’s client base, and clients can become witnesses, subjects, or defendants depending on the facts. At the state level, the FTB’s Criminal Investigation Bureau also investigates preparer fraud and state income tax fraud, and it can seek records, interview witnesses, and coordinate with other agencies when warranted. This dynamic explains why clients get blamed. The government may view the return as the client’s sworn act, view the refund as the client’s benefit, and view the client’s conduct during the audit as proof of knowledge or concealment.
You can still create a strong defensive posture, but you must act deliberately. The strategy depends on what the client knew, what the documents show, and how the government framed the issue. In some matters, we build a record of good-faith reliance and lack of willfulness while we address civil exposure through controlled document production, negotiated audit resolutions, and careful correction work. In higher-risk matters, we treat the case as parallel civil and criminal tax exposure from day one, control communications, and plan every step to avoid creating admissions or inconsistencies that could escalate into a criminal tax prosecution narrative. Our firm’s structure supports that approach. When you engage our attorneys for civil and criminal tax defense, our CPAs work under attorney supervision as employees of the Tax Law Offices of David W. Klasing as part of the legal team, and we design the engagement to preserve attorney-client privilege and work-product protections to the fullest extent the law allows. You should not try to “talk your way out” of preparer fraud with the same preparer who created it, and you should not let the government define your intent narrative before you develop facts and strategy.
Contact the Tax Law Offices of David W. Klasing if You Suspect Preparer Fraud Tainted Your Federal or California Returns
Contact the Tax Law Offices of David W. Klasing if you received an IRS or FTB notice tied to deductions, credits, or businesses you do not recognize, or if you learned that your preparer faces scrutiny, discipline, or an injunction risk. Preparer fraud cases rarely stay confined to a single year, and they can trigger multi-year examinations, refund reversals, and parallel federal and California exposure. We can step in early, stabilize communications, and build a defensible factual record before an audit hardens into a criminal tax investigation posture.
Contact our dual-licensed Tax Attorneys & CPAs immediately if your preparer refused to sign your return, filed as a “ghost preparer,” promised an outsized refund, or routed funds in a way that does not make sense. Those facts can signal a scheme that investigators already track. Early intervention gives you the best chance to correct the record without handing the government a willfulness narrative, especially when you need to decide whether to amend, disclose, or report preparer misconduct through sworn submissions.
It would be wise to retain us if you want a coordinated civil and criminal tax defense strategy that treats every interaction as evidence-in-the-making, and that targets the real goal: preventing escalation. Our dual-licensed team can defend audits, manage investigations, and address the preparer-fraud dimension in a way that protects you, not the preparer. Call (800) 681-1295 or use the firm’s online scheduling and contact options HERE to request a confidential, reduced-rate initial phone consultation.
