Many years ago, my accountant looked at me sadly as he finished my tax return. "You are really getting hit this year," he said. "You need some dependents. My daughter is a lovely girl with three beautiful children. That's four deductions right there."
"What are you suggesting?" I asked. "I've never even met your daughter."
"You don't have to," he said. "It would just be for tax purposes."
He wound up in prison and all of his former clients, including me, were ruthlessly audited by the IRS. Another accountant once tried to rent me his house in the Bahamas and said I could write off the travel and rent as a business deduction, claiming I had attended a professional conference.
The world is, of course, full of con men, scam artists, and chiselers of all stripes, never more so than at this time of year when the iron boot of the state falls upon us all, demanding its fair share of our income for the year.
While you are no doubt honest and forthright, not all tax preparers are and some, like my former CPAs, may make suggestions that sound attractive but in reality are paths that can lead straight to the federal penitentiary. It's your name on the tax return and if you let your preparer pull any funny business, you may be held equally responsible.
The IRS and the Justice Department are onto just about any clever little tax dodge you can think of and the chances of getting caught are actually pretty high. Of the 150 million returns filed in 2014, the IRS identified more than 2.1 million as claiming fraudulent refunds totaling more than $15.7 billion. In 2015, 35 fraudulent tax preparers were shut down and many were prosecuted on criminal charges.
“Every year, thousands of federal income tax returns are prepared by people who care much more about making a quick buck than about preparing accurate returns,” said Acting Assistant U.S. Attorney General Caroline D. Ciraolo. “Most tax return preparers are honest. But some preparers who charge clients a percentage of their tax refund intentionally prepare false returns to increase their clients’ refund, and thus their own fees."
Ciraolo said also that some preparers who charge by the form will intentionally prepare incorrect forms that their clients don’t need in order to increase their compensation.
"Taxpayers might think that they’re getting a good deal on their taxes, or that as long as someone else prepares the return, they’re not responsible. They’re wrong. Taxpayers who have their return prepared incorrectly are required to pay the tax they owe, or pay back the refund they weren’t entitled to get. These clients might also owe interest and penalties, which can be substantial," she said.
Ciraolo lists some red flags you can watch for when choosing a tax preparer:
Your refund should never be deposited directly into a preparer’s bank account. To be sure your payment goes where it is supposed to go, it must be made directly to the IRS and your state tax collector.
Never sign a blank return or a blank form, or sign a return or a form without reading it first. By law, a return preparer must provide a client with a completed copy of the return no later than the time the customer is asked to sign the return. Failing to review it carefully can land you in hot water.
Don’t use a preparer who mischaracterizes your expenses. Remember that trip to the Bahamas? The IRS nabbed a preparer who pulled a similar stunt, deducting purchases at Tiffany & Co., Louis Vuitton, and Royal Caribbean Cruise Lines as “medical expenses.”
Don't set up phony businesses. One of the most common dishonest return-preparation practices is to prepare returns that include non-existent businesses, sometimes based on a client’s hobbies. Collecting trout lures is fine but don't call it a business if it isn't.
Some other fraudulent schemes and practices that have been stopped by federal courts include:
- Fabricating fake Form W-2 (Wage and Tax Statement) information;
- Claiming bogus education and first-time homebuyer credits;
- Claiming phony child and dependent care credits or residential energy credits;
- Claiming fraudulent fuel tax credits;
- Falsely exempting foreign earned income;
- Inflating unreimbursed employee business expense deductions; and
- Fraudulently inflating or decreasing a client’s income or deductions to maximize the Earned Income Tax Credit.
The IRS advises taxpayers who ask a tax professional to prepare their return to be careful in the professional they select. The IRS offers some basic tips and guidelines and even a number of instructional YouTube videos. They're worth checking out.
No less a public figure than Donald Trump freely admits to doing everything legal to minimize his annual tax payment. There's nothing wrong with that but the key word is "legal." When presented with an option that sounds too good to be true, chances are it is.