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Taxpayers and Tax Preparers Alike Can Be Burned When Understating Tax Liabilities and Overstating Refunds

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Taxpayers and Tax Preparers Alike Can Be Burned When Understating Tax Liabilities and Overstating Refunds

Don't get burned by Understating Tax Liabilities and Overstating Refunds

Uncle Sam pointing at the camera in the classic poster pose

For at least some taxpayers and tax preparers, their foremost goal is minimizing or eliminating the taxes that they or their clients owe. For taxpayers, this view makes sense because few people would like to pay more in taxes than they are legally obligated to pay. For tax preparers who are often trying to differentiate themselves from the competition with promises of “maximum refunds” or the “largest tax refund” can face enormous pressure to deliver on these promises. As such, both taxpayer and tax preparer can act against their better judgment and make unsupported or highly aggressive claims that would result in an understatement of tax liabilities or an unjustified inflation of one’s tax refund.

The tax lawyers and tax professionals of the Tax Law Office of David W. Klasing understand the consequences false or fraudulent tax declarations can cause for both taxpayers and tax preparers. If you are facing tax problems because of alleged inaccurate tax filings, the tax professionals at the Tax Law Offices of David W. Klasing may be able to help. We have tax law offices located conveniently in Los Angeles and Irvine, California.

DOJ Seeks to Permanently Bar Tax Preparer Due to Deliberate Misstatements

As described above, at least some tax preparers attempt to make a name for themselves by promising or otherwise guaranteeing that they will provide the greatest possible tax refund or the lowest possible tax bill. Tax preparers who make promises of this type before assessing the individual’s taxes may find themselves facing a situation where the taxpayer has few options to minimize their tax burden. Alternatively, the taxpayer may have failed to select an appropriate withholding, did not pay self-employment tax, or made other errors that would create a large tax liability.

Certain tax preparers facing a situation of this type may be tempted to play fast and loose with the facts. Consider the situation now faced by tax preparer Billy Phillipe who is facing charges spearheaded by the Department of Justice. Mr. Phillippe is alleged to have deliberately understated his clients’ income tax liabilities while overstating the refunds the clients were entitled to receive. In particular, prosecutors claimed that Mr. Philippe would frequently claim the Earned Income Tax Credit. Even in situations where the EITC was justified, Mr. Philippe allegedly would falsely inflate wages or self-employment income to make additional fraudulent claims.

According to prosecutors, Mr. Philippe engaged in these practices from 2011 to 2015. In all, it is believed that at least 899 taxpayers are impacted. Audits of 44 returns prepared by Philippe from 2014 through 2015 showed an aggregate tax loss to the federal government of more than $300,000 due to methods that prosecutors characterize as improper or fraudulent.

Falsely Claiming Dependents Is Another Means to Fraudulently Minimize Tax Liability

In another tax enforcement action against a tax preparer, a federal court permanently prohibited former tax preparer Daria Emma Valdivia from preparing federal tax returns for other people. In a government complaint against her individually and her business, federal prosecutors alleged that Ms. Valdivia would improperly report unqualified individuals as dependent and fraudulently claim the resultant tax benefit. Prosecutors also claimed that Ms. Valdivia would mischaracterize the individual’s filing status and fabricate additional information to trigger larger than deserved tax refunds.

According to prosecutors, Ms. Valdivia continued to engage in behavior of this type despite a previous penalty of $132,000 for similar issues. An audit of 65 returns prepared by Ms. Valdivia found that she had underreported clients’ tax liabilities on 89 percent of the returns by an aggregate total of more than $285,000.

Tax preparers and Taxpayers Can Face Prison Time

In situations like these, it is more likely for the tax preparer to face the most severe penalties which could include a federal prison sentence. However, if the auditor or IRS agent believes that the taxpayer willfully engaged in tax evasion or tax fraud, then he or she can also face similarly harsh criminal penalties. Taxpayer’s that have filed a series of fraudulent returns should not try and correct the mistakes made by the preparer through quietly filing amended returns as the amended returns could be viewed as a criminal admission. If this is your fact pattern seek a consultation with a criminal defense tax lawyer.

Tax preparers and taxpayers facing the fallout of a tax enforcement action focusing on false statements in tax returns or interference with the administration of the tax system should consider professional representation. The auditor and prosecutor in your matter are highly trained and handle similar tax matters every day. Working with a tax lawyer, such as the tax attorneys at the Tax Law Offices of David W. Klasing can help level the playing field. To schedule an initial, reduced rate tax consultation call 800-681-1295 or contact us online.