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Some tax preparers promise fat refunds, then fleece consumers

People put their financial lives in the hands of professional tax preparers -- sometimes to their detriment. A new lawsuit by state prosecutors in Illinois alleges that some preparation firms scammed their customers.

Chicago resident Stephen Lewis told the state attorney's office that he hired a tax prep firm called Nu Republic to prepare his return after seeing ads in his neighborhood, and was told the fee would be about $400 to $500. At the Nu Republic office, Lewis was invited to spin a prize wheel and was told he'd won a two-day cruise to the Bahamas. 

But Nu Republic charged him double its estimate -- $1,099.87 in fees -- and he later learned that his state income tax return was never filed, the lawsuit alleges. As for that Bahama trip, the cruise line said it couldn't actually verify whether he'd won a trip. 

Tax scams surge during tax season as fraudsters target the roughly $282 billion in tax refunds issued each year by the U.S. Treasury. Some scammers aim to claim some of those funds by filing fraudulent returns, pretending to be another taxpayer in order to grab their refund. But the IRS says consumers also need to be wary of dodgy tax-prep firms, including "ghost preparers" that lack the Preparer Tax Identification Number (PTIN) required by the IRS to process returns.

"Dishonest and unscrupulous ghost tax return preparers look to make a fast buck by promising a big refund or charging fees based on a percentage of the refund," the IRS recently warned. "These scammers hurt honest taxpayers who are simply trying to do the right thing and file a legitimate tax return."

When can you expect your tax refund?

Tax preparers at Nu Republic and its sister company, Refund Republic, allegedly scammed consumers by promising big refunds and prizes such as the cruise dangled in front of Lewis, Illinois Attorney General Kwame Raoul said in the lawsuit. 

An email sent to Nu Republic's email addressed bounced back. Nu Republic franchise owner Toure Muhammad told CBS Illinois that he was stunned by the allegations. 

"We don't have any people that have come to us," Muhammad said. "Any problems saying, 'Hey, you all took some money from us, you all overcharged us.' We're very transparent. We're very open."

High fees, tax errors

The tax preparers are accused of repeatedly charging consumers far higher fees than they initially estimated, made mistakes on their tax filings and, in some cases, failed to file the returns.

Nu Republic allegedly charged consumers for unnecessary tax products and took fees out their refunds without their consent or knowledge, the lawsuit alleges. The fees in some cases ate up the taxpayer's entire refund. 

Red flags

Consumers should beware of tax preparers that advertise large refunds or incentives, Raoul said in a statement. 

"People should be wary of tax preparers who offer 'free' incentives and promise big refunds, because these offers can ultimately lead to expensive, and in some cases, prohibited fees," he noted. 

The IRS warned that "ghost preparers" don't sign tax returns because they don't have a PTIN, as required. Because of that, they print returns and ask the taxpayer to sign and mail it to the agency. The IRS said to look for red flags such as:

  • Requesting payment in cash 
  • Failing to provide a receipt
  • Creating false data such as fake income or deductions to boost refunds
  • Sending refunds to the tax preparers' own bank accounts instead of the taxpayer's

Many taxpayers can file their taxes for free using tools such as FreeFile. That service allows taxpayers generally earning less than $66,000 to file their federal taxes via TurboTax, H&R Block and 10 other private software providers.

The IRS estimates about 70 percent of Americans are eligible for FreeFile. There are options for free state preparation as well.