Fraudulent Intent - Not Just The Taxpayer, But Your Preparer

Caveat Emptor – Buyer Beware – Understanding the Role of the Tax Preparer in Your Taxes

Part 1:  The Red Flag

So, to give you a little background in to why this subject is so fascinating to me, let me tell you a short story about my first fraud case.  I was a young auditor 20 years ago at the IRS and I was doing a basic Schedule C (small business) audit.  First red flag was the “owner” had another full time job and this Schedule C coincidentally brought his AGI down to the exact dollar to maximize his EITC credit.  So, that was just that…a red flag…not a “gotcha”, just raised my anatases a little bit.  So, I met with the “tax preparer”.  I looked around his office and noticed he had a degree from a local university.  I chit chatted a little and asked him about his school.  He gets flustered.  Then I realize why…he had a fake diploma with the word “University” misspelled on it.  Red Flag #2.  So, I get into the audit and I ask him for his client’s mileage log.  He gives it to me. I look through January, give it a checkmark…but then I saw that his February calendar seems a little off…as in it had mileage listed for February 29^th, February 30^th, and February 31^st!!  Flag on the play!!!!  It ended up that I had more than one audit with this “preparer” who had the exact same “February 30^th” mileage log.  From that day forward, I became intrigued by tax fraud.  It ultimately ended up being my career.  Everyone lost because of that preparer’s greed.  The taxpayer ended up paying back large sums of taxes, interest and penalties.  The preparer was hit with preparer penalties.  Over the years, I have investigated literally thousands of bad tax preparers.  Some of them were intentional.  Some of them were just incompetent.  Everyone loses. 

Part 2:  The Players

Before I dive into the particulars of this fascinating case, let’s talk first about the IRS codes and regulations behind the scenes and some important terminology:

1.)  The Statute of Limitations:  “Generally” (I say that word very carefully because as you will soon learn there are always exceptions) the IRS has a 3 year statute of limitations to file an assessment of tax on your account.  This 3 years begins to run, generally, the date that you file your tax return or its due date, which ever is later.  The IRS usually has 10 years to collect on an assessment.  Again, there are exceptions. 

2.)  Exceptions to the Statute:  26 U.S. Code § 6501 - Limitations on assessment and collection lists out 4 exceptions:

1 – False Return – No statute, can be assessed at any time

2 – Willful Failure to Evade – No statute, can be assessed at any time

3 – No Tax Return Filed – No statute, can be assessed at any time

4 – Extension By Agreement

Part 3:  Not All Preparers Are Equal

Did you know that the IRS currently has NO requirements for calling yourself a “paid tax preparer.”  Literally, your 9 year old can become a paid tax preparer.  A lot of people do not understand the difference between a “preparer” versus a “CPA”, and most people have never heard of an “Enrolled Agent”.  Know the difference before you choose a preparer. (And as a general rule, in my opinion, you should avoid preparers that are in strip malls that also serve as a check casher, tattoo artist, and bail bondsman all put together in one…in my opinion…)

Be sure to read the next installment in this series entitled “Can You Be Held Responsible for Your Preparer’s Actions?!”