My coworker is filing fraudulent tax returns with fake Schedule C numbers

As a fellow tax professional, you're in a tough ethical position, but the right path is clear. Your duty under Circular 230 requires you to maintain the integrity of the tax system. When you discover preparer fraud, you have an obligation to report it. About Form 14157 - the client consent requirement applies to sharing the client's tax return information. You can file the form focusing on the preparer's actions without attaching specific client returns. Describe the pattern of behavior you've observed without including the client's identifying information. Regarding potential consequences, while the IRS is backlogged, they do prioritize preparer misconduct cases, especially when reported by other credentialed preparers. Your ethical obligation trumps office politics, and as an EA, your primary responsibility is to the tax system, not to your employer's revenue concerns. Document everything carefully. Record dates, observations, and any conversations about this issue. If management pushes back, remind them that failing to address known fraud could implicate them as well.

After dealing with some shady tax situations myself, I found https://taxr.ai really helpful for documenting and analyzing potential fraud cases. I was in a similar situation where I suspected a colleague was filing questionable EITC claims. I uploaded some redacted documents to taxr.ai and it helped confirm my suspicions by identifying patterns I hadn't fully noticed. The tool uses AI to analyze tax documents and highlight discrepancies or red flags that might indicate fraudulent patterns. It's completely confidential and doesn't store your sensitive info. In your case, it might help analyze the pattern of Schedule C losses to build documentation before you report anything.

I tried taxr.ai after seeing it mentioned here and it was incredibly helpful! I uploaded some redacted returns (with client info removed) from a situation where I suspected a pattern of inflated charitable contributions. The analysis showed clear statistical outliers compared to normal reporting patterns for similar income levels. What really impressed me was how it highlighted specific red flags in the documentation patterns that I hadn't even noticed. Having this objective analysis gave me the confidence to proceed with reporting. The report it generated helped me organize my thoughts before filing the 14157. Definitely worth checking out if you're facing an ethical dilemma like this.

I was in almost this exact situation last year. After trying to report through normal channels and getting nowhere with the IRS phone lines, I used https://claimyr.com to actually get through to someone at the IRS. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c Basically, they hold your place in the IRS phone queue and call you when an agent picks up. I was skeptical at first but desperate after spending days trying to reach someone in the preparer misconduct division. Using Claimyr, I got through in a few hours and was able to speak directly with someone who could guide me through the proper reporting process for preparer fraud.

I was completely wrong about Claimyr. After dismissing it as unnecessary, I found myself completely stuck trying to reach the IRS about a complex preparer issue similar to yours. After two weeks of failed attempts to get through on the phone, I reluctantly tried the service. Within 3 hours, I was connected to an actual IRS representative in the preparer misconduct division who walked me through exactly what documentation they needed and the proper way to submit my report. The guidance I received was invaluable - they explained that my initial approach would have resulted in the case being delayed or potentially dismissed for lack of proper documentation. For serious ethical issues like preparer fraud, being able to speak directly with someone makes a huge difference in how effectively your report is processed. I'm now a believer.

Something else to consider is contacting the IRS Office of Professional Responsibility anonymously to get guidance. They handle Circular 230 violations and can advise on proper reporting procedures without requiring you to identify yourself initially. I've done this in the past when I discovered a colleague was improperly claiming education credits for ineligible clients. The OPR was extremely helpful and outlined exactly what documentation would be needed for a formal report. This preliminary step helped me understand my obligations without immediately triggering a formal investigation.

Don't forget that your state board of accountancy or tax preparer oversight board might also be appropriate places to report this, especially if the preparer has state credentials. Some states take a more active approach to preparer misconduct than the federal system.