Spotting Tax Preparer Scam Red Flags: 7 Warning Signs Business Owners Can’t Ignore in 2025

Most small business owners trust their tax preparer to keep them out of trouble. But across California and the U.S., the IRS is increasing its pursuit of tax preparer fraud, and the cost of trusting the wrong person could bankrupt your business—or drain your personal savings. In 2024, nearly 13,000 returns were flagged for suspected preparer misconduct or criminal fraud. Here’s how to avoid becoming the next headline.

A real tax preparer scam often starts with inflated promises—bigger refunds, faster filings, or “special deductions” no one else knows about. The IRS Criminal Investigation Division has made this a top enforcement priority, charging more than 600 preparers in 2024 for refund fraud and identity theft. The agency’s focus is clear: if your preparer manipulates income figures or creates fake credits, both you and the preparer could face civil penalties and potential felony charges.

Quick answer: To stay safe, make sure your tax preparer reviews your books, gives you full visibility into the numbers, explains your credits, and never discourages IRS contact. If they push questionable deductions or demand cash, it’s time to walk away and report them.

This blog explains the insider warning signs the IRS and reputable CPAs see again and again, giving California and nationwide business owners the confidence to prevent identity theft, IRS penalties, or worse.

Red Flag #1: Your Preparer Doesn’t Review Your Books or Financials

Legitimate tax professionals always request your profit & loss (P&L), balance sheet, and business bank statements. If your preparer “guesses” numbers without reviewing these foundational documents, you’re at risk for misreporting—and a fast track to audit triggers or criminal penalties. Example: John, an S Corp owner in Los Angeles, gave a preparer only his revenue totals. When the preparer skipped the expense review, his return omitted $17,500 in legitimate deductions—but claimed a suspicious $5,000 “consulting expense” that flagged his return for audit. John is now facing a $9,300 penalty and an IRS request for explanation.

Why Does This Happen?

• Fake preparers want speed (and volume), not accuracy.
• Scam artists may want to avoid paper trails or limit questions.

The fastest way to spot a tax preparer scam is to look at the preparer’s signature line on your Form 1040 or 1120. IRS regulations (IRC §6695) require every paid preparer to include their Preparer Tax Identification Number (PTIN). If that box is blank—or they refuse to e-file using their own credentials—you’re likely dealing with a ghost preparer committing fraud under your name.

💡 Pro Tip: If they don’t ask for your P&L, walk away—fast. Always keep a digital copy of all business financials for at least 7 years.

Red Flag #2: You Don’t Understand Your Deductions or Credits

True tax strategists educate their clients. If your preparer can’t explain which deductions or credits go on your return, expect trouble later. For example, Sarah, a Sacramento retailer, let her preparer claim a $10,000 research tax credit she didn’t qualify for—because he promised a higher refund. Two years later, she was on the hook for repaying it, plus 20% interest and an IRS penalty of $2,100.

Will This Trigger an Audit?

If you can’t explain your deductions to the IRS, you have a target on your back. The IRS expects business owners to understand the basics of their own returns—ignorance is not a defense.

Red Flag #3: Cash-Only Payments

This one’s simple: If your preparer insists on being paid in cash, that’s a fluoro-red warning sign. The IRS and California Franchise Tax Board have both warned that cash-only operations are common among scam artists hoping to avoid being tracked. In 2024, IRS enforcement teams targeted over 1,800 cash-only preparers for fraud investigations—including several high-profile cases in the Bay Area.

• Legitimate firms accept checks, cards, or digital payments.
• Demanding cash makes it nearly impossible to dispute fees or get refunds if things go wrong.

What If I Paid Cash Last Year?

If you realize you paid cash for suspicious tax prep, request a written receipt and ask for a summary of your last tax return immediately. If the preparer refuses, consider reporting them to the IRS using Form 14157.

If you’ve fallen victim to a tax preparer scam, act fast. File IRS Form 14157 (Complaint: Tax Return Preparer) and, if your refund or identity was stolen, add Form 14039 (Identity Theft Affidavit). The IRS can freeze fraudulent refunds and flag your account to prevent future misuse. From a strategy standpoint, amend your return quickly to show good faith—early correction often prevents the harsher negligence penalties under IRC §6662.

Red Flag #4: They Discourage You from Contacting the IRS

Any tax pro who says, “Don’t talk to the IRS, I’ll handle everything,” is waving a massive red flag. It’s your right—and your responsibility—to address IRS notices, questions, or concerns directly. No one (not even a licensed CPA or EA) can serve as a barrier to your direct IRS communication.

🔴 Red Flag Alert: Several recent IRS criminal investigations featured preparers instructing clients to ignore or destroy IRS mail. This is often part of a coverup and can be prosecuted as aiding tax evasion.

Red Flag #5: Pushes Questionable or Outlandish Deductions

Does your preparer “guarantee” a refund or always claims suspiciously high business deductions (like 90% of your rent or vehicle expenses)? In California, the IRS flagged over $40 million in ‘improper home office deductions’ in 2024 returns alone. If your preparer gets aggressive with deductions far outside industry norms, you are liable for any resulting penalties.

How Do I Know If a Deduction is Legit?

• Always ask for a simple, plain-English explanation from your preparer.
• If it sounds too good to be true, it probably is.
• Refer to the latest IRS Publication 535 for allowable business deductions in 2025.

Red Flag #6: No Physical Office, Vague Business Name, or No Credentials

Many scam preparers are “ghost” operations—no office, no business listing, no professional credentials. A legitimate preparer can provide:

• A business address you can verify on Google Maps
• A legitimate business name registered with your state
• Professional credentials (CPA, EA, or CTEC number for California)

If you can’t find the preparer’s office, or they refuse to give you their real name or license number, step away immediately.

Red Flag #7: Lacks Transparency About Fees, File Copies, or Your Rights

Do they refuse to provide a copy of your filed tax return? Are fees hidden or variable “based on your refund”? The IRS requires that preparers give you a complete copy of your return and fully disclose their fees. In 2024, over 2,400 complaints to the IRS involved preparers who withheld returns after payment disputes.

One of the most common forms of a tax preparer scam is refund-based pricing—where the preparer’s fee is tied to the size of your refund. The IRS has warned taxpayers (see Publication 4832) that this structure encourages fraud, since it rewards inflated deductions and false credits. Legitimate professionals charge fixed or hourly rates based on complexity, not refund results. If your preparer says, “I’ll take a percentage of your refund,” that’s your cue to walk away.

How to Protect Yourself

• Get all fees in writing—upfront—and never base payment solely on your refund amount.
• Always receive a full copy of your prepared return.
• Protect your Social Security Number and business EIN by confirming your preparer’s licensing status at IRS Directory of Preparers.

Common Myths and Mistakes About Tax Preparers

Myth: “If a professional does my taxes, I’m not responsible for errors.”
Reality: The IRS holds you—the business owner—personally liable for inaccurate information and unpaid taxes, even if your preparer was at fault.

Myth: “All credentialed preparers are safe.”
Reality: Even credentialed CPAs have been sanctioned or disbarred. Always check for active licensing and past disciplinary actions.

Common mistake: Failing to change preparers after a bad experience. If you suspect fraud or questionable practices, switch immediately and file a complaint to protect yourself for the 2025 tax year.

FAQs: Your Next Questions Answered

How do I verify a tax preparer’s legitimacy?

Search the IRS Directory of Federal Tax Return Preparers, check the CTEC site for California, and confirm reviews and listings on Google and LinkedIn.

What documentation should my preparer be providing me?

You should receive a copy of your e-filed return, year-end summary, and a signed engagement letter outlining fees and services rendered.

What if I already filed a fraudulent return by accident?

Act immediately: amend your return (using IRS Form 1040-X), report concerns to the IRS, and consult with a legitimate tax strategist to mitigate penalties and avoid prosecution.

This information is current as of 10/7/2025. Tax laws and IRS enforcement change frequently. Always verify credential status and use the latest guidance at IRS.gov if reading this post at a later date.

Book Your Strategy Session and Trust Your Tax Advisor

If you’re uncertain about your tax preparer or want an expert second opinion on your 2025 business taxes, we’ll review your filings and give you a clear action plan—no judgment, just protection. Book your personalized tax consultation now.