“Of course the truth is that congresspersons are too busy raising campaign money to read the laws they pass. The laws are written by staff tax nerds who can put pretty much any wording they want in there. I bet that if you actually read the entire vastness of the U.S. Tax Code, you’d find at least one sex scene.”  — Dave Barry

Tax Preparation Firms

You hire a doctor or lawyer, although you have no technical knowledge about the practice of medicine or the rules of law. Many of you hire your tax preparer just as blindly — and particularly when based on some acquaintances’ misleading comment that, “He got me a big refund.” (Why would that possibly apply to the particular circumstances of your own tax return… unless the implication is that his tax preparer is creating deductions.)

• The IRS estimates that about 500,000 paid tax preparers may have no formal training. Only California and Oregon require special education or licensing to prepare income-tax returns. Some other tax preparers may be the guys that valet-parked your car last week, or bagged your groceries, or similar.
• If you are audited, only a CPA, or an Enrolled Agent (EA) or a tax lawyer can represent you before the IRS.
• Storefront tax preparation firms that appear in January and disappear April 15 will not be here to represent you if you are audited by the IRS. (They remind me of the “building contractors” that appear right after a flood, tornado or earthquake — and disappear just before your new driveway collapses.)
• Never use a tax preparer that immediately promises you “a big refund” or refuses to sign your tax return (also with required I.D. number) or adds fictitious expense deductions.
• Do not ever, ever hire a tax preparer that charges you a percentage of your tax refund, rather than a fee based on other parameters such as time, flat rates or complications.
• Keep in mind that under the law, the IRS can and will hold you responsible for everything on your tax return. You have absolutely no chance of putting the blame on that unscrupulous tax preparer, usually vanished anyway (his storefront is now occupied by a small retail food store — and they never heard of him — but they have some very nice cantaloupe today).
• If you foolishly sign a consent to your tax preparer, he/she can sell the contents of your tax return to credit card companies or other marketing organizations.
• Predictions are that the IRS will eventually get Congress to require unlicensed tax preparers to take tests and regularly renew their eligibility or perhaps require a special license.
• Getting a “refund-anticipation loan” is an absolute sucker play! Particularly with the spread and speed of electronic filing, but even in general, you may get your refund in 10 to 14 days — without paying any interest and/or fees, as charged on these “loans.” In 2005, nearly 10 million people paid over $1 billion in these loan fees — with annual interest rates ranging from 57% to 1,100%. As they say: “Nobody ever made a mistake by underestimating the intelligence of the American people.”

Tax Preparer Lawsuit

The federal government has sued the operators of more than 125 Jackson Hewitt Tax Service tax preparation offices. They are accused of cheating the U.S. Treasury out of more than $70 million through a “pervasive and massive series of tax-fraud schemes.” (These represent five independently owned franchises of Jackson Hewitt, which is the second-largest tax preparation firm in the U.S. and has about 5,800 franchised offices.)

Investigators accused the defendants of encouraging bogus tax returns by such means as: 1) claiming fake deductions; 2) claiming fake fuel tax credits; 3) requesting refunds based on fake earnings statements (Forms W-2); and 4) abusing the earned income tax credit.  In some cases the managers and other employees took kickbacks for helping taxpayers file fraudulent tax returns. (Defendant Farrukh Sohail owns all or part of the five franchises.)

This is the fourth time that U.S. investigators have targeted Jackson Hewitt since July 2006. In January 2007 they agreed to pay $5 million to settle claims that it steered low-income customers in California to high-cost loans to tide them over while they awaited refunds. (See above comments about refund-anticipation loans.)

I trust every reader realizes that regardless of the dishonesty of any tax preparer  —  once you the taxpayer sign and file a tax return with the IRS, you are personally liable for everything on the tax return — no matter who, or how, or under what circumstances a paid preparer is involved!

But cheer up — there’s even worse news to come — besides being personally liable, a new tax case signals even more woes if you used a dishonest tax preparer….

Recent Tax Preparer Case

In a startling ruling, the Tax Court has declared that the statute of limitations for the IRS to assess taxes on a fraudulent tax return is permanently suspended — regardless of whether the fraud was committed by the taxpayer, or by the tax return preparer! They stated that the “plain meaning of the Code does not suggest that the limitations period is extended only in the case of the taxpayer’s fraud.” (Vincent Allen, 128 Tax Court No. 4)

In other words, if your tax preparer creates a fraudulent tax return and you (innocently or not) sign and file it — there is no statute of limitations as to when the IRS can come after you for fraud. It could even be 10 or 15 years later and triggered by some other audit or event.

In this case the taxpayer turned all his information over to a paid tax preparer. The tax preparer claimed false itemized deductions for (among others): charitable contributions (see next section), meals and entertainment, and pager and computer expenses. For this (and obviously many other cases) the paid preparer was indicted, tried, and convicted of “willfully aiding and assisting in the preparation of fraudulent income tax returns.”

Then the IRS came after the truck driver-taxpayer (and probably every other taxpayer that used this particular tax preparer) and issued a deficiency notice disallowing a number of those phony itemized deductions on his 1999 and 2000 tax returns.. The taxpayer agreed that some of them were fraudulent, but he argued that the (normal) three-year statute of limitations had expired — and should not be extended since the intent to commit fraud was not his, but the preparer’s. And the Tax Court shot down his argument as follows:

IRS Code Section 6501 requires that generally the IRS must make any assessment of tax for a tax period within three years after the taxpayer files the return for that period. However, there is an exception to this rule for any false or fraudulent return “where there is an intent to evade tax.” In such cases, the IRS can make an assessment at any time in the future or it can proceed in court to collect the tax without any assessment. Noticeably absent from this provision is any express requirement that the fraud only be the taxpayer’s.

Taxpayers are charged with knowledge and awareness of their tax returns, and the responsibility for them. Taxpayers cannot hide behind their tax preparers’ fraud. As this case establishes, fraud on the part of the tax preparer taints and becomes fraud on the part of the taxpayer, and then (one more time) there is no statute of limitations.

Charitable Contributions in View of this Case and Under the New Tax Law

Effective January 1, 2007, the new law requires that taxpayers must have either: (1) a receipt, or (2) a canceled check, or (3) a credit card record, for every monetary contribution — regardless of the amount! That’s from one dollar up! Plus, the existing law that you must obtain charity-provided documentation for donations of $250 and above still applies. Estimates of any amount are no longer valid! Taxpayers can no longer tell their tax preparers “put down the same as last year” or “I gave about $xxx… I think.”

Let’s face it. Sometimes tax preparers just supplied estimates of these contributions in the past. Sometimes (more frequently) taxpayers did the same. Nobody in his or her right mind is going to do so now because if the tax preparer or the taxpayer does so — just reread the preceding section. To emphasize, self-created records such as a logbook or a detailed computer listing of contributions are worthless. You must have one of the three only acceptable proofs listed above — or you get no deduction at all — no matter how small (or large) the amount may be.

Also, effective August 17, 2006 and after, donations of used clothing and household goods must be in “good used condition or better” to be deductible. What that means is not defined in the new law, although the IRS promises to issue a definition. However, single items appraised at more than $500, are still deductible, even if in less than good condition.

As all this applies to every 2007 tax return, no honest tax preparer in his or her right mind is now going to be a party to creating charitable donation deductions. After reading all the preceding, hopefully neither will any taxpayer participate in such actions. In our firm, as in virtually all other legitimate tax preparer firms, we will accept and deduct whatever amounts are supplied to us by our clients…with or without proof (we don’t audit our clients — the IRS does). However, if our clients do not supply us with any amounts for charitable contributions — we will deduct nothing! Can you blame us for this position…or any other paid tax preparer you may hire?

A Guaranteed Audit Using the Wrong Tax Preparer

The IRS hates what they call “adopting a frivolous position” by either you or your tax preparer acting on your behalf. They list 40 positions that have no basis under the law and/or have been deemed frivolous in court. The special penalty for adopting any one of these positions is now $5,000 — in addition to the regular taxes, interest and penalties you will owe.

What I want to emphasize, and what the IRS does not say, is that in addition to getting killed by the IRS in any year you do so — you can almost count on being placed on a list for follow up audits in future years. The cumulative costs of this nonsense include large professional fees, mental strains, time spent, the costs described above — and the future costs of future audits. Without any chance of winning in the courts.

In a recent IRS release on this topic, they selected four frivolous positions that have already been the topic of IRS Revenue Rulings. This indicates how particularly incensed they are when any of these claims are made:

• Wages are not taxable income.
• Filing returns and paying taxes are voluntary.
• The IRS must provide taxpayers with a summary record of assessments before overdue taxes can be collected.
• Income is not taxable if the taxpayer declares he or she is not a U.S. citizen.

And remember once more, if a tax preparer talks you into claiming any of these four (or any of the other 36 of these absurd positions) — you are personally liable to the IRS!

Another Guaranteed Audit, at Least

The IRS easily shoots down the frivolous positions just described, but if you want to send them ballistic, get involved in what they technically call a “listed transaction.” These are what the IRS really calls “tax scams,” and their undying hatred stems from the fact that these have been peddled to thousands of taxpayers with resulting losses to the IRS of billions of dollars in tax revenues.

(You may recall the national CPA firm of KPMG was one of the leaders in designing and selling these so-called “tax shelters.” They were one of the primary reasons these new IRS controls are in place. KPMG was fined over $400 million, while certain of their clients paid back hundreds of millions of dollars to the IRS…and many are now suing KPMG.)

The IRS first termed these ideas THE IRS DIRTY DOZEN, but their list has now grown to over 30 of them. Taxpayers are required to File Form 8886 and voluntarily disclose their involvement in any transaction called a “listed transaction” by the IRS.

• Not filing Form 8886, when required, is itself a serious violation of the Internal Revenue Code.
• Involvement with any of these listed tax scams can result in “imprisonment and fines” for the taxpayer and his professional adviser or tax preparer.
• Then the IRS can and will obtain a list of all clients of either the promoter or tax preparer and audit them all looking for listed transactions (delicate words for “criminal tax fraud”).

Here are just a few of the various tax scams that the IRS is very actively examining:

• Hiding income offshore, in banks, brokerage houses, foreign trusts, offshore credit cards, employee leasing, private annuities — and any other scam for hiding income in foreign countries.
• Private annuity trusts used to transfer highly appreciated assets to avoid or defer taxable gains.
• Deferred compensation plans with offshore arrangements to avoid the taxes on compensation.
• Dummy offshore insurance companies which indirectly return premiums through the use of offshore Private Placement Life Insurance and Swiss Annuity. Sometimes involving the sale of business interests without paying taxes on them
• Foreign employment leasing companies designed to avoid or defer compensation so as to avoid income taxes.
• Many uses of trusts to avoid taxes on income in various ways.
• Enron-type special purpose entities and trusts used to avoid taxes.
• Many, many more illegal, albeit clever, ways to avoid/evade income taxes. Virtually all of them are illegal. As the IRS says, “You can face imprisonment and fines.”

Appeal Rights

After all the preceding advice, perhaps you are still in trouble with the IRS. If you disagree with the IRS about the amount of your tax liability or about proposed collection actions, you have the right to ask the IRS Appeals Office to review your case. IRS employees are required to explain your right to appeal if you so request.

The Appeals Office is independent of the IRS office that proposed the disputed action. They can work with you by correspondence, telephone, or informal conference. Through Appeals procedures, taxpayers can settle most differences without expensive and time-consuming court trials. In many cases we have found them more “reasonable” than the agent with whom you have the dispute. Their goal is to settle the dispute, if they reasonably can.

However, if you and the Appeals Officer or Settlement Officer cannot reach agreement — or if you prefer not to appeal within the IRS — in most cases you may take your agreement to the courts. See IRS Publication 1, Your Rights as a Taxpayer, and IRS Publication 5, Your Appeal Rights and How to Prepare a Protest if You Don’t Agree, for more details.

Taxpayer Advocate Service (TAS)

If you have tried to resolve tax problems with the IRS and are still having problems or facing economic harm, you can seek the free confidential assistance of the TAS. The TAS is also an independent organization within the IRS whose employees assist taxpayers in those circumstances, or those who believe the system is not working as it should.  Call the TAS case intake line at 877·777·4778.

You may be eligible for this assistance if: (1) you are experiencing economic harm or significant costs (including fees); (2) you experienced a delay of more than 30 days to resolve your tax issue; or (3) you have not received a response or resolution to the problem by the date promised the IRS.