The IRS has well publicized in recent times that they are stepping up their enforcement of going after unscrupulous tax preparers. As you don’t have to be licensed or educated or have any experience to accept a fee to prepare a tax return, various shady people have decided to set up tax offices, and they prey on mostly low-income taxpayers who do not know that their tax preparer may or may not know what they are doing.
One time, I received a call from another professional in Colorado who specializes in tax resolution. They had a client in South Florida who was being investigated by the IRS. This person was a tax preparer, and my colleague asked if I would represent the client, as they couldn’t make the trip to South Florida.
Knowing that an examination of a tax preparer usually amounts to the IRS collecting information and forwarding it to Criminal Investigation (CI), I recommended hiring a criminal attorney and having the lawyer issue us a Koval Letter. As representatives, we have limited attorney-client privilege. However, if we are engaged by the lawyer and are issued a Koval Letter, the attorney’s privilege transfers to those covered by the document.
The day before the examination, I met with the tax preparer and went through their files. Their office was in Wilton Manor, which is a well-to-do area of South Florida. It is the norm for the residents of this city to hire nannies and other household help. However, the residents do not pay these workers' payroll taxes or issue W-2s. Therefore, when these workers file their tax returns, they are left to figure out their income, as most are paid in cash, and report it to the IRS.
As I was examining the returns, I noticed “household income” was listed under "other" on each document. The income was subject to self-employment tax, thus making it “earned income,” for the purposes of the Earned Income Tax Credit (EITC). Further, each client was in college and received the American Opportunity Credit (AOC), which was also refundable. It seemed that every return I looked at for 2015 followed the same pattern. However, in 2016, the reporting of household income changed.
The client used Drake Software, which required the tax preparer to list the household income as wages. I asked the client why there was a change, and they said the tax program changed the way it was to be reported. So I asked the preparer: Was I supposed to tell the IRS examiner that? I mean, a tax preparer is supposed to know the actual law, not what the software tells them.
Finally, there were three other people at the meeting. As it turned out, the tax preparer I was representing supposedly prepared all 750 returns the company did that year. The other three people were barred from doing so because they got in trouble for inflating income and credits a few years back and got their PTIN and ERO numbers taken away. In fact, they were barred from preparing tax returns for eight years. However, the client I was representing had a full-time job during tax season and somehow prepared 750 returns. As this was a field audit, I told all four of the people to go to the beach for the day, give me an assistant and not show up at the office.
My personal opinion is that anyone that issued a PTIN should take some test to demonstrate their knowledge of basic tax law. In addition, since they are handling sensitive client information, they should be subjected to an rigorous background check. When representing a client, you need to take your personal feelings out of it. I realized that the IRS was on a fishing expedition to gather evidence. My job was to not make their job easy. Further, I knew the IRS would want photocopies, so I instructed my client to have only one thing of toner and just two reams of paper on hand.
When the audit began the next day, the IRS wanted to see several returns and make photocopies. Around 1 pm, by design, we ran out of toner and paper. The agents left with instructions about other returns they wanted to see, and we made plans to meet at this preparer’s second office in Miami Beach. I called my client and gave them the same advice about one thing of toner and two reams of paper. Shortly after lunch, and again by design, we ran out of paper and toner.
My thoughts were to limit the amount of evidence they could collect until I met with the criminal attorney the next day. Again, the examiners left a list of the returns they wanted to see, and the client was told to mail them.
The next day, I explained to the lawyer why I did what I did, and he said that was the best thing I could do. The moral of the story? Even if what they are doing goes against your personal beliefs, your obligation is to your client.
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...