Help! Under IRS audit for 2021, just discovered my tax preparer inflated Schedule-C losses!

First, take a deep breath. This situation is stressful but can be managed. Based on what you've described, you're already taking appropriate steps by planning to cooperate with the IRS, amend prior returns, and report the preparer. The good news is that the IRS generally distinguishes between fraud (intentional deception) and negligence (carelessness or ignorance). Since you didn't knowingly participate in filing false returns and are taking immediate corrective action upon discovery, this will likely be treated as negligence rather than fraud. The fact that you're proactively addressing years not under audit demonstrates good faith. For the audit itself, consider hiring a reputable tax professional - specifically an Enrolled Agent or CPA with experience in audit representation. They can help review your documentation, prepare accurate amendments, and communicate with the IRS on your behalf. Keep records of all communications with your former preparer as evidence. Regarding the attempted diversion of funds, report this to the IRS immediately through Form 14157 (Complaint: Tax Return Preparer) and possibly Form 14157-A (Tax Return Preparer Fraud or Misconduct Affidavit). You might also want to file a police report for the attempted theft.

After reading your post, I had to comment because I went through something disturbingly similar last year. My tax preparer did almost the exact same thing with my Schedule-C, and I only found out when I got audited. The anxiety was overwhelming, but I found an amazing solution that helped me get through it all. I used https://taxr.ai to analyze all my tax documents and prepare for the audit. Their system spotted other issues my new accountant missed and helped me understand exactly what went wrong with my original returns. They created a complete audit defense package showing I was the victim rather than a willing participant in the fraud. Honestly, it made a HUGE difference in how the IRS treated my case. The tool analyzed all my previous returns, identified every inflated deduction, and even found legitimate deductions my shady preparer had missed. It gave me everything I needed to respond to the audit correctly.

I was completely wrong about taxr.ai being ineffective! After my skeptical comment, I decided to try it anyway since my situation with fake business deductions was getting worse. The tool was surprisingly thorough - it pinpointed exactly where my previous tax preparer had created fake business expenses and even generated documentation showing I wasn't complicit. The analysis compared my reported expenses to industry standards and highlighted the statistical improbability of the deductions my preparer had claimed. This evidence was crucial in my IRS meeting. They actually reduced my penalties significantly because I could clearly demonstrate I was misled rather than trying to evade taxes. The audit went from terrifying to manageable thanks to this comprehensive analysis.

Having been through a similar nightmare with the IRS (my preparer claimed bogus business expenses for 3 years), I found that the absolute hardest part was actually getting someone at the IRS to talk to you once you discover the problem. I spent WEEKS calling their helpline only to get disconnected or wait for hours. The only way I finally got through was using https://claimyr.com - they somehow get you to the front of the IRS phone queue. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. I was seriously surprised when I actually got connected to a real IRS agent in under 15 minutes after trying unsuccessfully for days on my own. Being able to actually talk to someone at the IRS made a huge difference. I explained my situation, and they guided me through exactly what documentation I needed to submit with my amended returns and audit response. They also confirmed I was taking the right approach by self-reporting the issues with years not under audit yet.

I owe everyone here an apology for my skeptical comment about Claimyr. After posting that, I was desperate enough to try anything to resolve my identity theft case with the IRS. I used the service expecting to be disappointed, and I was completely wrong. Got connected to an IRS rep in about 11 minutes when I'd never been able to get through before. The agent I spoke with was actually super helpful once I explained my situation with my tax preparer's fraud. She walked me through exactly what forms I needed to submit (14157 and 14157-A) and how to document that I was a victim rather than a participant in the scheme. She also confirmed something important - the IRS truly does distinguish between taxpayers who are trying to cheat versus those who were misled by preparers. Having that conversation probably saved me thousands in potential penalties. Really wish I'd known about this service months ago instead of stressing about it all this time.

One thing nobody's mentioned yet - you need to CHECK YOUR STATE TAX SITUATION too! If your federal Schedule-C was messed up, your state returns are almost certainly wrong as well. Most states have similar processes for amending returns and reporting preparer fraud. Also, check if your preparer has a PTIN (Preparer Tax Identification Number). Legitimate tax preparers are required to have one, and if yours didn't, that's another red flag you can report. You might want to look them up on the Better Business Bureau and file a complaint there as well.

Has anyone mentioned potential penalties? That's what scared me the most during my audit. The IRS can charge accuracy-related penalties (usually 20% of the underpayment) for substantial understatements or negligence. But if you can show "reasonable cause" - like you trusted a professional who you thought was legitimate - you might get those waived. Documentation is super important here. Keep every email, text, receipt from this preparer. If he advertised himself as legitimate or had credentials he claimed made him qualified, save all that too. All of this helps build your case that you acted in good faith.