Watch out for tax refund theft

Dear Liz: My cousin had his house broken into a little over a year ago. A lot of things were taken, but insurance replaced most of what he thought was missing. This year after he filed his return he was contacted by the IRS, which told him that a return using his information had already been filed and the refund check cashed. The IRS is investigating the situation now, but I really worry about what is going to happen to his Social Security in the future if someone else is using his numbers or those of his children. Do you have any information on what steps he should take?

Answer: Theft of tax refunds is a growing problem. In fact, tax identity theft is the No. 1 fraud on the IRS’ list of Dirty Dozen Tax Scams of 2012.

The fraud is often perpetrated by organized criminal gangs that con, steal or buy people’s personal information to create bogus returns. Some people fall right into the bad guys’ hands by responding to emails that purport to be from the IRS. (The IRS doesn’t email people to request personal or financial information.)

If the problem isn’t resolved within a few months, your cousin should contact the agency’s Identity Protection Specialized Unit at (800) 908-4490.

Since the criminals already have his Social Security number and other important financial information, he also should put security freezes on his credit reports at all three bureaus. Links to the bureaus and other information for identity theft victims can be found on the IRS’ site at

Who pays for tax pro’s mistake?

Dear Liz: Last year I bought an electric vehicle, motivated in part by the $7,500 federal tax credit. I consulted with my tax preparer, a CPA, to ensure I would generate enough income to fully use the one-time, use-it-or-lose-it credit. In December 2011, I informed her of the exact type of that year’s income (earned income, capital gains, dividends, interest and so on) and detailed all my deductions. She assured me that based on those numbers my tax burden was $8,600, more than sufficient to use the credit. It was enough, in fact, that I could use more deductions and losses, so I made some charitable contributions and sold a losing investment. The final numbers were very close to the estimates she received from me in December. Now that she has completed my federal tax return, however, my tax burden turns out to be far less than she estimated. In fact, it’s zero. Ordinarily I’d be delighted, but I specifically consulted with her to ensure I had a large-enough tax burden to use up the credit. I could have sold some winning investments to generate a bigger tax burden, but have now lost that credit forever. So far she has not responded fully to questions about what happened, and I now suspect she may simply have guessed at the tax burden and not run the numbers through any tax preparation software. I feel that she has in effect cost me $7,500. Am I right to be aggrieved and do I have any recourse?

Answer: Of course you’re right to be aggrieved. One of the reasons to hire a tax professional is to get good advice about managing your tax bill.

Human beings make errors, of course. No one is perfect. But it’s disturbing that your CPA hasn’t told you clearly why she made the mistake she did or, apparently, offered any kind of recompense.

When tax pro mistakes cost you money, it’s typically because the preparer underestimated your tax burden and the IRS catches the error. In that case, your tax pro shouldn’t be expected to pay the extra tax, since you would have owed the money anyway if she’d done the return correctly. But many tax preparers will offer to pay any penalties or interest the taxpayer owes because of their errors, said Eva Rosenberg, an enrolled agent who runs the site.

In this case, of course, your pro overestimated your tax burden, ultimately costing you a valuable credit. You could always ask her to compensate you for some or all of that lost credit. At the very least, she should be willing to refund any fee she charged you for her advice, Rosenberg said.

You may want to review your own behavior to make sure you didn’t contribute to this situation. Given the amount at stake, you should have called to set up a formal appointment in which the two of you could go over the numbers and your previous year’s tax return, if she didn’t prepare it. That would ensure she had enough information to make a reasonable prediction. If instead you called her up with a “quick question” — tax questions are rarely quick, by the way, and the answers almost never are — then you helped set yourself up for a disappointing outcome.

In any case, you should find another tax pro, since this incident — and her handling of it — indicates she’s not quite up to the job of being your advisor.