Fake Credits and Invented Children Drive a Fall Wave of Tax Preparer Fraud Cases

Oct 30

7 min read

Updated: 5 hours ago

A federal jury in Brooklyn on October 21, 2026, convicted a paid tax return preparer who ran a business in the East Elmhurst section of Queens on all 14 counts of an indictment charging him with preparing false returns and related wire fraud. According to the release announcing the verdict, the returns at issue, for tax years 2020 and 2021, claimed solar energy expenses and sales of business property that never happened, fictitious business expenses, and children who did not exist. Prosecutors said they expect to show at sentencing that his conduct resulted in many thousands of false returns and a loss of more than $24 million to the IRS. He faces up to 20 years in prison.

The verdict caps a busy six weeks for preparer prosecutions. Since September 10, federal courts have sentenced preparers in Alabama, North Carolina and Missouri, and a federal trial in Arizona has ended in another conviction. The cases vary in size, but they share a pattern: fabricated entries engineered to produce bigger refunds, in some cases without the client's knowledge, and clients who remain answerable to the IRS for what was filed in their names.

The recent cases

Dothan, Alabama (sentenced September 10): A preparer who began preparing returns in 2015 received 57 months in federal prison. In her plea agreement she admitted that her own 2023 return left out preparation fees she had earned and withheld from clients' refunds. According to the release, she prepared false returns for herself and clients covering tax years 2020 through 2025, including a client return prepared in January 2026 that claimed a business and earned income the client never had. The court ordered $314,247 in restitution; the government estimated the actual loss over the full scheme at more than $2.1 million.
Greenville, North Carolina (announced September 23): The owner of a local tax preparation business was sentenced to more than two years in federal prison and ordered to pay $1,508,171 in restitution for aiding and assisting in the preparation of a false return. From 2018 to 2023, according to the release, she invented Schedule C business income and expenses to create Earned Income Tax Credit claims.
St. Louis (announced September 30): A former downtown St. Louis preparer, convicted by a jury in July on 16 counts, was sentenced to 56 months and ordered to repay $270,793. Prosecutors said she invented businesses and expenses, exploited a pandemic-era credit meant for people who were sick or caring for sick family members, and fabricated fuel purchases to support credits, including a claim that a full-time liquor store cashier bought 40,000 gallons of fuel in a year. In one case she quoted a $700 fee and charged $5,000. Investigators identified more false returns, and the IRS civilly audited 37 others.
Tucson, Arizona (found guilty October 5): A paid preparer was found guilty on 22 counts of preparing false federal returns for clients without their knowledge. Twelve clients testified that they never claimed the deductions that appeared on their returns. The IRS estimated the tax loss at about $127,166. Sentencing is set for February 23, 2027.

How the schemes work

Preparer fraud usually runs on a simple business model: larger refunds bring repeat customers, referrals and higher fees. The recent cases show the techniques that make the numbers move.

Phantom businesses. A made-up Schedule C can manufacture a loss that offsets wages or, for a lower-income household, create just enough self-employment income to maximize the Earned Income Tax Credit. Fabricated Schedule C activity appears in the Greenville, St. Louis and Dothan cases.
Credits and entries that are hard to verify quickly. Residential solar, fuel tax and pandemic-era sick and family leave credits, like reported sales of business property, turn on facts the client is supposed to document rather than on a third-party form the IRS can match automatically. That makes them attractive to dishonest preparers.
Invented dependents. The Queens release says the preparer frequently claimed children who did not exist. Jurors saw a secretly recorded interaction in which, according to the release, he "invented a child out of thin air" for an undercover IRS agent.
Fee games. Fees withheld from refunds and then left off the preparer's own return (Dothan), and fees far above the quoted price (St. Louis).
Clients kept in the dark. In Tucson, clients testified that they never claimed the deductions involved, though their refunds were larger than in past years.

One timing point matters for the coming filing season. The IRS says the residential clean energy credit under Section 25D is not allowed for expenditures made after December 31, 2025, and that an expenditure is generally treated as made when installation is completed. A new solar credit claimed for a system installed in 2026 should therefore prompt questions. Carryforwards of unused credits from earlier years are a separate matter.

Why the client still carries the risk

The IRS is blunt on this point: taxpayers are ultimately responsible for the information on their returns, no matter who prepared them. When a preparer comes under investigation, client returns can be examined as well; in the St. Louis case, the IRS civilly audited 37 of them. Clients can owe the tax that was improperly avoided, plus interest and, depending on the facts, penalties. A refund produced by false entries is not the client's to keep.

Red flags before you sign

The IRS has flagged these warning signs of an untrustworthy or "ghost" preparer:

Fees based on a percentage of the refund, or cash-only payment with no receipt.
A request to route the refund into the preparer's bank account instead of yours.
A preparer who will not sign the return or include a Preparer Tax Identification Number (PTIN).
E-filing with a pay stub instead of a Form W-2.
Income, deductions or credits you did not provide or do not recognize.

Other cautions drawn from these cases: a refund much larger than in prior years with no change in your circumstances, and a fee that grows once the refund is calculated. Reluctance to hand over a complete copy of the return is another warning sign.

Controls and documentation

For individual filers:

Insist on a complete copy of the return as filed, with every schedule and form, and keep it.
Review the forms where fabrications tend to hide: Schedule C, Form 5695 (residential energy credits), Form 4136 (fuel tax credits), Form 4797 (sales of business property), Form 7202 (sick and family leave credits for the self-employed) and the dependents section.
Compare what was filed with your IRS account transcripts, available through an IRS online account.
Check credentials through the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.
Keep receipts, invoices and records supporting every deduction and credit.

For business owners:

Require written engagement letters that state the fee and the scope of work.
Do not allow a preparer to add a credit unless the business can produce the source documents behind it, such as fuel purchase records tied to a qualifying use.
Have someone other than the preparer review the return against the books before it is signed.

For owners of tax preparation firms: The St. Louis release notes that the preparer's returns carried an unusually high share of credits compared with state and national averages. Firms can run the same kind of analysis on their own staff, comparing each preparer's credit rates, refund sizes and Schedule C frequency against firm and regional norms, and sampling outliers for documentation.

The enforcement backdrop

Federal prosecutors are now being told to look for tax crimes in every fraud case. On October 7, the head of the Justice Department's new National Fraud Enforcement Division issued Directive 26-13, announced publicly on October 8. It instructs the division's prosecutors to assess, in every case, whether there is reason to believe a violation of the internal revenue laws has occurred and, where tax charges could materially advance the case or asset recovery, to invite IRS Criminal Investigation to evaluate the tax side of the conduct.

Where to report

Form 14157, Complaint: Tax Return Preparer, for preparer misconduct.
Form 14157-A, Tax Return Preparer Fraud or Misconduct Affidavit, if a preparer filed or changed your return without your consent.
Form 14242 for suspected abusive tax promotions.

If you used a preparer now under scrutiny

Get copies of every return the preparer filed for you and compare them with your records and IRS transcripts.
If you find entries you did not provide, consider consulting a CPA, enrolled agent or tax attorney about amending the affected years with Form 1040-X before the IRS contacts you.
Respond to any IRS notice by its deadline, and keep copies of all correspondence, fee receipts and messages with the preparer.
Report the preparer using the forms above.
If an IRS problem is causing financial hardship, the Taxpayer Advocate Service may be able to help.

The cases this fall are a reminder that a signature line is not a formality. The person whose name is on the return is the one the IRS will come back to.

Sources

This article is general information, not tax, legal, or accounting advice. Consult a qualified professional about your situation.