Tax Preparer Defense Attorney

The IRS searches for red flags to identify potential tax preparer fraud when analyzing taxpayers’ returns. However, these red flags do not always indicate fraud and require further examination. The IRS pays special attention to patterns of red flags in multiple returns filed by a particular tax preparer or company. Certain examples of red flags for the IRS are taken into consideration, such as:

• Cash Contributions to Charities: Tax fraud is frequently committed by individuals who falsely claim cash donations made to charities as deductions. The Internal Revenue Code (IRC) permits tax deductions for cash donations, but there is a modest limit that taxpayers can claim. Given the absence of proper documentation, many taxpayers choose to claim this deduction as a way of lowering their tax liability.
  Taxpayers and tax preparers should not assume that fraudulent cash contribution deductions will go unnoticed by the IRS. When a tax preparer or firm submits multiple tax returns that claim deductions for cash contributions, there is a higher chance of the IRS investigating.
• Earned Income Tax Credits: Fraudulent use of the Earned Income Tax Credit is a common type of fraud that can result in trouble with the IRS for both taxpayers and tax preparers. This involves falsely claiming the credit and manipulating the income data of taxpayers to illegitimately increase their credit amount. The IRS instructs taxpayers to be cautious and identify any potential fraudulent activity regarding Earned Income Tax Credits claimed by their clients. If the provided information seems incomplete, inconsistent, or incorrect, taxpayers should ask further questions, record the answers, and decide whether the responses make sense. If taxpayers are unsure about the credibility of the client or uncomfortable with the responses, they should refuse to prepare the return as a precautionary measure.
• Education Credits: Education credits are susceptible to fraud similar to cash contributions and the Earned Income Tax Credit. To claim education credits, substantiating documentation must be obtained by taxpayers. Failure to do so can result in taxpayers being deemed complicit if their clients’ claims are untrue. Tax preparers who consistently file returns claiming education credits, especially in the same amount, may be inferred to be committing fraud for their clients.
• Failure to Report Gross Receipts: All businesses must report their gross receipts to the IRS, including those received in cash, credit, checks, and cryptocurrency. Failure to report these receipts is a typical form of small business tax fraud, and tax preparers are also responsible for ensuring their clients submit accurate returns to prevent any fraudulent activity.
  The IRS can detect businesses’ failure to report taxable income through different methods, such as comparing their gross receipts and expenses or requesting information about their cryptocurrency transactions from exchanges. If a tax preparer is aware of or should be aware of inaccuracies in a business’s reported gross receipts, they can be held responsible.
• Kickbacks Between Taxpayers and Tax Preparers: Tax fraud investigations may be initiated when a tax preparer and a taxpayer have an agreement to illegally increase the taxpayer’s refund or decrease their tax liability by paying the preparer. Both the tax preparer and the taxpayer may face criminal charges for this transaction.
• Repeatedly Claiming Losses: Filing tax returns with repeated losses every year can raise suspicion with the IRS. A tax preparer who regularly files such returns for clients may face an audit or investigation into their practices. If a tax preparer cannot provide sufficient proof from their clients to support these annual loss claims, they may face civil or criminal enforcement action.
• Residential Energy Credits: Taxpayers and tax preparers should be aware that claiming residential energy credits without proper documentation can lead to fraud. If tax preparers offer to claim these credits for their clients using insufficient documentation, they may face liability if the IRS decides to audit or investigate.
• Suspicious Dependents: The IRS considers dependents to be “suspicious” in certain situations. These situations include when there are discrepancies between the last names of the taxpayer and claimed dependents when Social Security numbers are repeatedly used, and when there are differences in the tax returns of the taxpayer and claimed dependents. It is the responsibility of tax preparers to address any concerns before filing their clients’ tax returns, and if they intentionally assist their clients in making false statements to the IRS, they can face criminal charges.
• Underreporting Taxable Income: Tax preparers can be held accountable for both civil and criminal liability if they assist their clients in underreporting taxable income, regardless of the type of income. This includes wages and salary, independent contractor income, gig economy income, and income from self-managed investment accounts such as cryptocurrency. If an IRS audit or investigation uncovers that a tax preparer contributed to or ignored their clients’ underreporting of income, they can be subject to criminal penalties according to the IRC.