The IRS is Enhancing Its Efforts to Combat Tax Fraud and Evasion By Targeting Tax Preparers Who Help Their Clients File Fraudulent Returns
When it comes to enforcement, the Internal Revenue Service (IRS) has one primary goal: Making sure U.S. taxpayers pay what they owe. But, while the IRS may be primarily focused on collection, it does not focus solely on auditing, investigating, and prosecuting taxpayers. To cast as wide a net as possible, the IRS is increasingly targeting tax preparers as well.
To do so, the IRS relies heavily on data analytics. By analyzing all returns filed with a particular tax preparer’s signature, the IRS can identify trends and anomalies that are indicative of tax evasion and tax fraud. The IRS has identified several “red flags” for tax preparer fraud—as discussed in greater detail below—and when its data analytics tools uncover these red flags, the IRS pursues civil or criminal enforcement as warranted.
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Aaron L. Wiley
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Why Clients Across the Country Trust The Criminal Defense Firm in High-Stakes Federal Cases
As a tax preparer, facing scrutiny from the IRS can put your career, your finances, and your future in jeopardy. As a result, you need experienced legal representation. Here are just some of the reasons why tax preparers and other clients across the country trust The Criminal Defense Firm when they stand to lose everything if they are unable to present an effective defense:
1. Our Team of Senior Attorneys
At The Criminal Defense Firm, all of our attorneys have senior-level experience. At no point will you have a paralegal or junior associate working on your federal case. When you are dealing with the IRS or IRS Criminal Investigation (IRS CI), experience is the most important asset you can have on your side.
2. Our Nationwide Network of Former Federal Agents (Including IRS CI)
Our federal defense attorneys work alongside former federal agents (including former Special Agents with IRS CI) across the country. Our nationwide network of former federal agents ensures that our clients have the insights they need where and when they need them.
3. Our Proactive Approach to Federal Defense
When we represent tax preparers and other clients during IRS audits and investigations, our goal is to resolve the inquiry without penalties being imposed or charges being filed. This proactive approach not only minimizes our clients’ risk, but it minimizes the costs of their defense as well.
4. Our One-On-One Advice and Custom-Tailored Defense Strategies
We take a personalized approach to every audit and investigation we handle. As a client of The Criminal Defense Firm, you can expect to receive one-on-one advice throughout your federal case. Our lawyers will build a custom-tailored defense focused on protecting you to the fullest extent possible based on the facts and circumstances at hand.
5. Our Results in High-Stakes Federal Cases
Our proactive and custom-tailored approach to IRS (and other) federal audits and investigations has resulted in a substantial track record of success. We have protected numerous clients against charges and penalties in extremely high-risk scenarios—and we rely on the insights gained from this experience to protect our new clients as efficiently as possible.
The IRS’s “Red Flags” for Tax Preparer Fraud
The IRS looks for several “red flags” when examining taxpayers’ returns for signs of tax preparer fraud. When the IRS identifies these red flags—whether through a direct review or through its data analytics software—it will frequently take action against both the taxpayer and the tax preparer.
Crucially, however, the IRS’s identified red flags are not necessarily indicative of tax evasion or tax fraud. As a result, tax preparers targeted in audits and investigations will have strong defenses in many cases. At The Criminal Defense Firm, we rely on our lawyers’ extensive experience and work alongside our clients to identify all available defenses and dispute the IRS’s allegations by all means available.
Some examples of the IRS’s red flags for tax preparer fraud include:
1. Cash Contributions to Charities
The Internal Revenue Code allows a limited deduction for cash contributions, and the relatively low limit ($600 for the 2022 tax year) combined with the lack of required documentation makes claiming these contributions an attractive option for reducing taxpayers’ liability. If a substantial portion (or all) of a tax preparer’s clients claim cash contributions to charities, this can trigger scrutiny from the IRS.
2. Earned Income Tax Credits, Education Credits, and Residential Energy Credits
Federal credits like the earned income tax credit (EITC), education credit, and residential energy credit are also ripe for abuse. To avoid liability for aiding and abetting taxpayer fraud, tax preparers must conduct adequate due diligence to confirm their clients’ eligibility.
3. Failure to Report Gross Receipts and
For business clients, tax preparers also have a duty to ensure that they are comfortable with their clients’ reporting of their gross receipts. Underreporting receipts from any source or in any form (i.e., cash or cryptocurrency) is a common form of tax fraud for which both taxpayers and tax preparers can be held accountable.
4. Kickbacks from Taxpayers to Tax Preparers
Fees paid to tax preparers above and beyond the standard fees for their tax preparation services may be viewed as illegal kickbacks by the IRS. If a tax preparer accepts payment for assisting a taxpayer with claiming a fraudulent refund or fraudulently reducing the taxpayer’s liability, the taxpayer can face civil or criminal prosecution under the Internal Revenue Code.
5. Repeatedly Claiming Losses
If a taxpayer repeatedly claims losses on his, her, or its annual return, this is another red flag for both taxpayer and tax preparer fraud. Here too, when preparing clients’ returns, tax preparers have a duty to inquire about any claimed losses that appear to be suspect in light of the circumstances presented.
6. Suspicious Dependents
Along with suspicious losses, suspicious dependents are also a concern for tax preparers. The IRS considers a dependent to be “suspicious” in various circumstances, including when a dependent’s last name is different from the taxpayer’s last name, when taxpayers’ and dependents’ returns are inconsistent, and when tax preparers use the same Social Security number for multiple dependents.
7. Underreporting Taxable Income
The IRS has various means of identifying when taxpayers underreport their taxable income. If a tax preparer assists a taxpayer with underreporting his, her, or its taxable income, both the taxpayer and the tax preparer can face an audit or investigation.
Additional Issues That Can Lead to Audits and Investigations of Tax Preparers
In addition to these red flags, there are many other issues that can lead to scrutiny of tax preparers’ practices as well. For example, in recent years, we have seen an uptick in cases involving issues such as:
- Calculation of gain and loss from cryptocurrency transactions;
- Claims of eligibility under the Paycheck Protection Program (PPP) and other government relief programs; and,
- Underreporting businesses’ liability for both the employer’s and the employee’s share of FICA taxes.
What To Do if You are a Tax Preparer Facing an IRS Audit or IRS CI Investigation
If you are a tax preparer and you are facing scrutiny from the IRS or IRS CI, you need to engage experienced defense counsel promptly. The inquiry is not simply going to go away; and, if you ignore it, it will most likely lead to charges. At The Criminal Defense Firm, we can deal with the IRS or IRS CI on your behalf, and we can use our experience to favorably resolve your audit or investigation as quickly, favorably, and quietly as possible.
FAQs: Tax Preparer IRS Audit and IRS CI Investigation Defense Strategies
Can a Tax Preparer Be Held Liable for Relying on a Client's Statements or Documents?
Yes, tax preparers can face liability in IRS audits and investigations even if they rely on the information their clients supply. The IRS makes clear that tax preparers have a duty to do more than simply receive and process information from their clients. Tax preparers have an obligation to perform additional due diligence in many circumstances, and their failure to do so can lead to civil or criminal penalties.
What Are the Risks of Facing an IRS Audit or Investigation as a Tax Preparer?
As a tax preparer, the risks of facing an IRS audit or investigation can be substantial. Under Section 7206(2) of the Internal Revenue Code, tax preparers can face the same penalties as their clients if they aid or assist in the preparation of fraudulent returns. These penalties include up to a $100,000 fine and three years of federal imprisonment.
How Can I Defend Against an IRS Audit or Investigation as a Tax Preparer?
Just like taxpayers, tax preparers who are facing IRS audits and investigations need to rely on the advice and representation of experienced federal defense counsel. While there are a variety of potential defenses to tax preparer liability, determining which defenses apply and asserting them effectively requires an in-depth understanding of the Internal Revenue Code and the IRS’s auditing and investigating tactics.
Speak with a Senior Federal Defense Attorney at The Criminal Defense Firm
If you need help dealing with the IRS or IRS CI as a tax preparer, we encourage you to contact us promptly for more information. Call 866-603-4540 or contact us online to speak with a senior federal defense attorney at The Criminal Defense Firm as soon as possible.