Why You Can't Lie to a Tax Pro
To beat one system, you have to compromise the other. I am not the smartest person in the world, but I have a philosophy: about 70 percent of your clients aren’t telling you the truth.
I met with a client the other day that showed $23,000 in adjusted gross income (AGI), $12,000 in mortgage interest and $2,000 in property taxes, married and filing a joint return. He owned his own business, so the first thing I did was a simple cash flow analysis on him.
From my calculations, he needed at least $50,000 to maintain his lifestyle. He had no idea why I was asking all of these questions until I asked him if he could show me $27,000 in non-taxable income.
The client went on to tell me that he couldn’t show a lot of income because he had to pay his ex-wife child support. Know that I am the exact wrong person to say that to. I was raised by a single mom myself and had a deadbeat dad.
The client goes on to explain that he buys junk cars for cash, fixes them up and sells them for cash. He doesn’t report the cash because of child support and “cash isn’t traceable.” All the while his new wife is sitting there listening to how he is essentially screwing his kids and the government at the same time, but that is another story.
The company he owns is in his current wife’s name and he was paid $800 in 2016 as an employee. All I am thinking as he is explaining this is how do I soften the blow here? He then tells me that he has over $15,000 in cash sitting in a safe in his house, all derived from these car sales.
I state the obvious point and I tell him that cash is traceable. Not only that, but I did a simple cash flow analysis and the IRS would be more intense. I turn to his wife, who told him that she told him so and told her that these are joint tax returns and she would on the hook as well.
Furthermore, if audited the IRS would do a site visit to his shop, see that he is working a lot of hours and the company that his wife owns isn’t following the Wage and Hour Law, not to mention that a lot of his expenses are in cash. The obvious question is where did you get all of the cash?
I can remember a few years ago that I read an IRS alert stating that tax professionals were responsible for the Tax Gap, which is the difference between what someone should pay in taxes and what they actually pay. Tax avoidance is legal, evasion as you know is not.
In the State of Florida, if you sell a car to another party you have to pay sales tax. How does the state know that car has been sold? There is a title that needs to be filled out that states the price of the vehicle.
To skirt these taxes, some people state that the car was a “gift,” or sold for less than it actually was. If it is a gift, the taxes are skirted altogether and obviously stating the price is less means less sales tax.
There is an issue with doing what this guy is doing. First of all, the State will catch on if every car sold is a gift from this person to someone else. Second, all 50 states and the IRS have reciprocal agreements, whereby they exchange information with each other. The IRS knows this scam is going on.
The client in question goes on to tell me that when he got divorced, his wife got half of his pension and his child support was really high. This caused him to quit his job as a police officer, no less and do this for a living.
In Florida, if you acquire assets during a marriage, they are split down the middle. Child support is figured on a scale and collected by the Florida Department of Revenue. Further, if the child support isn’t paid, you go to jail. So, between tax fraud, defrauding the State of Florida and not paying child support, I have no idea how this man has slipped through the cracks.
Very calmly, I tell the man that I can’t take him on as a client and explain why. He then becomes belligerent and begins to disrespect me. I politely get up and ask him to leave, retreating to my working office. After him calling me every name in the book, he finally leaves.
What is sad is that someone will take this guy on simply because he will pay them. However, my respect as a professional is more important to me than money.
You might also be interested in
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...