Frost Law
While the IRS will never be as comedic as Venkman and Stantz, it is already taking ghost tax return preparers about as seriously as Egon Spengler in the 1984 classic, Ghostbusters. And in the Employee Retention Credit (ERC) context—well, the ghost preparers are multiplying at a frightening rate and leaving taxpayers mired in stickier messes than any Slimer could hope to achieve. Significantly, the ERC ghosts today often prefer to manifest and prepare Forms 941-X in one of these recognizable forms: “specialty payroll” and/or “consulting” companies.
So, what is a ghost preparer? What trouble can they cause for you and themselves, and what do you do if you encounter one?
In February of 2021, the IRS issued a news release with the headline, “Beware of ‘ghost’ preparers who don’t sign tax returns.”1 As explained therein, a ghost preparer is someone who prepares your tax return and then does not sign that return. Instead, as the IRS notes, the ghost preparer will print the return and let you sign and mail it (or for e-filed returns, the ghost preparer will prepare the return and submit it as “self-prepared”). So, like a ghost, they materialize for a time—i.e., to prepare your return—and then “disappear,” attempting to remain invisible to the fact that they ever prepared your return. The IRS has referred to these preparers as “unscrupulous” and “unethical.”
This may all sound relatively straightforward, but a closer look is required to fully appreciate the nature of this ghost.
First, the IRS defines a “tax return preparer” as:
Unfortunately, we are finding in the ERC context, especially, that the final element above—"for compensation”—is frequently misunderstood, even by the ghosts themselves. Many incorrectly believe that “for compensation” means that an explicit agreement to prepare the return in exchange for compensation must exist. Operating under that misunderstanding (or taking advantage of it intentionally), individuals and businesses are popping up to “consult” with employers about their ERC eligibility, and then they prepare the necessary ERC forms without signing them. When questioned about not signing the forms, they maintain that they are not return preparers and that they only charged for the consulting services provides.
Importantly, the IRS considers both explicit and implicit agreements as satisfying the “for compensation” element. Furthermore, “indirect compensation” can result in preparer’s qualification as a compensated tax return preparer.3 The longstanding IRS Revenue Ruling 86-55 considers this nuanced “for compensation” requirement in the following two examples:
Situation 1. X, a used car dealer, advertises that it will fill out and review income tax returns and that any resulting refund will be applied as a down payment on a used car. These services are available to those who purchase a vehicle. X or X's employee then either fills out a complete return or reviews a return prepared by the customer for both substantive correctness and mechanical accuracy. X does not charge its customers a separate fee for these services. The customer executes a power of attorney authorizing X to receive and endorse or negotiate the refund check. The address of X is substituted for that of the customer on the return. When X receives the customer's refund check, X endorses it and applies it as a down payment.
Situation 2. Y is a firm that offers discounted cash payments for tax refunds. Y or Y's employee either fills out a complete return or reviews a return prepared by the customer for both substantive correctness and mechanical accuracy. After the return is filled out or reviewed, Y pays the customer the amount of the refund requested on the return, less a discount typically equal to 20 to 40 percent of the refund amount requested. As in situation 1, the customer executes a power of attorney, and Y's address is substituted on the return for that of the taxpayer. Y does not charge a separate fee for its services in filling out or reviewing the return. Upon receipt of the customer's refund check, Y endorses the customer's name on the back of the check and deposits it in Y's account.
Note that the IRS determined that both X and Y were paid return preparers. Simply, the IRS views arrangements like these as “package deals.” In other words, as in Situation 1, the IRS notes that even though X does not charge the customer a separate fee for return preparation, “X’s compensation is included in the price of the cars required to be purchased by the customers.” Likewise, in Situation 2, the IRS concluded that “Y's compensation for filling out or reviewing the return is a part of, or is incident to, the various discount charges (ranging from 20 to 40 percent) that Y charges its customers for their refund checks.”4
Trained and trustworthy preparers who sign off on returns are cognizant of the high standard of conduct they are held to and the penalties for a violation of those standards. Ghost preparers don’t know, or don’t care, about such standards, and their unscrupulous actions subject both themselves and their victims to an array of problems.
Unfortunately, catching a ghost preparer is often trickier than wielding a proton pack, trapping a Slimer, and dumping it into a Containment Unit. However, for the ghost preparer that is caught violating the standards of performance and disclosure requirements applicable to persons who prepare tax returns and refund claims for compensation (as detailed above), the IRS can impose various costly civil penalties5 and even pursue criminal convictions. Indeed, the Justice Department’s April 2022 release highlights that:
Over the last year, the Tax Division has worked with U.S. Attorneys’ Offices around the country to bring civil and criminal actions against dishonest tax preparers, seeking civil injunctions to stop ongoing fraud, civil penalties or disgorgement of ill-gotten proceeds, and criminal penalties. The department’s message has been clear: those who prepare fraudulent returns will face serious and lasting consequences.6
Although it’s beyond the scope of this article to detail all civil and criminal actions possible, we will note that actions include: (1) costly penalties assessed under IRC §§66947 and 66958; (2) court-ordered disgorgement of ill-gotten gains; (3) injunctions or permanent bans from return preparation for others; and (4) imprisonment.
You, the taxpayer, ultimately remain legally responsible for the accuracy of all entries input on your tax return (including related schedules, forms, and supporting documentation) —whether or not it was prepared by you or a return preparer. And, remember, claiming the ERC is analogous to claiming a tax deduction on an income tax return in that the taxpayer filing the information must sign off on it under penalty of perjury. In the IRS’s recent warning, it emphasizes:
Businesses are encouraged to be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true. Taxpayers are always responsible for the information reported on their tax returns [emphasis added]. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.9
The general list of unethical or ghost preparer offenses is long. Ghost preparers have been known to do any of (and more than) the following:
And in the ERC context, the ghost preparers are growing particularly rapidly in numbers as the window of opportunity closes, filing improper and/or unsubstantiated claims for the credit, and exposing great numbers of employers—victims—to audits, repayment, penalties, and interest. If you know anyone saying, “I ain’t ‘fraid of no ghost,” let them know why they should be!
In practice, we are seeing unethical or ghost preparers do any of the following in the ERC realm:
Remember, claiming the ERC is not just running the numbers; rather, it involves an analysis of complex IRS guidance and careful application to an employer’s particular set of facts and circumstances. This analysis necessarily requires compilation and review of various records, and the IRS has clarified that an eligible employer needs to maintain such records to ensure that the employer is able to adequately substantiate their ERC eligibility. If a preparer appears willing to diminish any of these steps, be wary.
The last thing you want is to let a ghost preparer haunt your ERC process! A number of red flags are provided above, but the list is not exhaustive. If you believe that your small business may be eligible for the ERC, find a trusted firm which is respected in both tax accounting and legal representation. If something has given you goosebumps in the process thus far, don’t stick around waiting for the Ghostbusters to show up. Call our team today at (410) 497-5947 or schedule a confidential consultation.
.avif)
While the IRS will never be as comedic as Venkman and Stantz, it is already taking ghost tax return preparers about as seriously as Egon Spengler in the 1984 classic, Ghostbusters. And in the Employee Retention Credit (ERC) context—well, the ghost preparers are multiplying at a frightening rate and leaving taxpayers mired in stickier messes than any Slimer could hope to achieve. Significantly, the ERC ghosts today often prefer to manifest and prepare Forms 941-X in one of these recognizable forms: “specialty payroll” and/or “consulting” companies.
So, what is a ghost preparer? What trouble can they cause for you and themselves, and what do you do if you encounter one?
In February of 2021, the IRS issued a news release with the headline, “Beware of ‘ghost’ preparers who don’t sign tax returns.”1 As explained therein, a ghost preparer is someone who prepares your tax return and then does not sign that return. Instead, as the IRS notes, the ghost preparer will print the return and let you sign and mail it (or for e-filed returns, the ghost preparer will prepare the return and submit it as “self-prepared”). So, like a ghost, they materialize for a time—i.e., to prepare your return—and then “disappear,” attempting to remain invisible to the fact that they ever prepared your return. The IRS has referred to these preparers as “unscrupulous” and “unethical.”
This may all sound relatively straightforward, but a closer look is required to fully appreciate the nature of this ghost.
First, the IRS defines a “tax return preparer” as:
Unfortunately, we are finding in the ERC context, especially, that the final element above—"for compensation”—is frequently misunderstood, even by the ghosts themselves. Many incorrectly believe that “for compensation” means that an explicit agreement to prepare the return in exchange for compensation must exist. Operating under that misunderstanding (or taking advantage of it intentionally), individuals and businesses are popping up to “consult” with employers about their ERC eligibility, and then they prepare the necessary ERC forms without signing them. When questioned about not signing the forms, they maintain that they are not return preparers and that they only charged for the consulting services provides.
Importantly, the IRS considers both explicit and implicit agreements as satisfying the “for compensation” element. Furthermore, “indirect compensation” can result in preparer’s qualification as a compensated tax return preparer.3 The longstanding IRS Revenue Ruling 86-55 considers this nuanced “for compensation” requirement in the following two examples:
Situation 1. X, a used car dealer, advertises that it will fill out and review income tax returns and that any resulting refund will be applied as a down payment on a used car. These services are available to those who purchase a vehicle. X or X's employee then either fills out a complete return or reviews a return prepared by the customer for both substantive correctness and mechanical accuracy. X does not charge its customers a separate fee for these services. The customer executes a power of attorney authorizing X to receive and endorse or negotiate the refund check. The address of X is substituted for that of the customer on the return. When X receives the customer's refund check, X endorses it and applies it as a down payment.
Situation 2. Y is a firm that offers discounted cash payments for tax refunds. Y or Y's employee either fills out a complete return or reviews a return prepared by the customer for both substantive correctness and mechanical accuracy. After the return is filled out or reviewed, Y pays the customer the amount of the refund requested on the return, less a discount typically equal to 20 to 40 percent of the refund amount requested. As in situation 1, the customer executes a power of attorney, and Y's address is substituted on the return for that of the taxpayer. Y does not charge a separate fee for its services in filling out or reviewing the return. Upon receipt of the customer's refund check, Y endorses the customer's name on the back of the check and deposits it in Y's account.
Note that the IRS determined that both X and Y were paid return preparers. Simply, the IRS views arrangements like these as “package deals.” In other words, as in Situation 1, the IRS notes that even though X does not charge the customer a separate fee for return preparation, “X’s compensation is included in the price of the cars required to be purchased by the customers.” Likewise, in Situation 2, the IRS concluded that “Y's compensation for filling out or reviewing the return is a part of, or is incident to, the various discount charges (ranging from 20 to 40 percent) that Y charges its customers for their refund checks.”4
Trained and trustworthy preparers who sign off on returns are cognizant of the high standard of conduct they are held to and the penalties for a violation of those standards. Ghost preparers don’t know, or don’t care, about such standards, and their unscrupulous actions subject both themselves and their victims to an array of problems.
Unfortunately, catching a ghost preparer is often trickier than wielding a proton pack, trapping a Slimer, and dumping it into a Containment Unit. However, for the ghost preparer that is caught violating the standards of performance and disclosure requirements applicable to persons who prepare tax returns and refund claims for compensation (as detailed above), the IRS can impose various costly civil penalties5 and even pursue criminal convictions. Indeed, the Justice Department’s April 2022 release highlights that:
Over the last year, the Tax Division has worked with U.S. Attorneys’ Offices around the country to bring civil and criminal actions against dishonest tax preparers, seeking civil injunctions to stop ongoing fraud, civil penalties or disgorgement of ill-gotten proceeds, and criminal penalties. The department’s message has been clear: those who prepare fraudulent returns will face serious and lasting consequences.6
Although it’s beyond the scope of this article to detail all civil and criminal actions possible, we will note that actions include: (1) costly penalties assessed under IRC §§66947 and 66958; (2) court-ordered disgorgement of ill-gotten gains; (3) injunctions or permanent bans from return preparation for others; and (4) imprisonment.
You, the taxpayer, ultimately remain legally responsible for the accuracy of all entries input on your tax return (including related schedules, forms, and supporting documentation) —whether or not it was prepared by you or a return preparer. And, remember, claiming the ERC is analogous to claiming a tax deduction on an income tax return in that the taxpayer filing the information must sign off on it under penalty of perjury. In the IRS’s recent warning, it emphasizes:
Businesses are encouraged to be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true. Taxpayers are always responsible for the information reported on their tax returns [emphasis added]. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.9
The general list of unethical or ghost preparer offenses is long. Ghost preparers have been known to do any of (and more than) the following:
And in the ERC context, the ghost preparers are growing particularly rapidly in numbers as the window of opportunity closes, filing improper and/or unsubstantiated claims for the credit, and exposing great numbers of employers—victims—to audits, repayment, penalties, and interest. If you know anyone saying, “I ain’t ‘fraid of no ghost,” let them know why they should be!
In practice, we are seeing unethical or ghost preparers do any of the following in the ERC realm:
Remember, claiming the ERC is not just running the numbers; rather, it involves an analysis of complex IRS guidance and careful application to an employer’s particular set of facts and circumstances. This analysis necessarily requires compilation and review of various records, and the IRS has clarified that an eligible employer needs to maintain such records to ensure that the employer is able to adequately substantiate their ERC eligibility. If a preparer appears willing to diminish any of these steps, be wary.
The last thing you want is to let a ghost preparer haunt your ERC process! A number of red flags are provided above, but the list is not exhaustive. If you believe that your small business may be eligible for the ERC, find a trusted firm which is respected in both tax accounting and legal representation. If something has given you goosebumps in the process thus far, don’t stick around waiting for the Ghostbusters to show up. Call our team today at (410) 497-5947 or schedule a confidential consultation.
