On Friday, June 30, 2017, former CPA Brendel Deemer, 49, of New Orleans, Louisiana was charged with filing a false federal personal income tax return for tax year 2010. According to court records, Deemer (1) submitted business expenses for a defunct daycare center, while (2) omitting from the return business income earned through her CPA practice. On September 13, less than three months later, Deemer pleaded guilty in Louisiana federal court. In the case’s most recent development, Deemer was ordered to pay a $3,000 fine, pay restitution totaling approximately $88,651, and finally, serve a three-year probationary term. While these penalties may sound relatively light when compared to those imposed in similar cases – many of which culminate in a prison term – one must remember that Deemer will be burdened with a criminal record, and will likely struggle against professional sanctions, for years to come. Like each of the cases profiled by our criminal tax defense attorneys, Deemer’s case should serve as a warning to CPAs and everyday taxpayers alike – especially with the swift approach of April 17, which is the 2018 deadline to file an income tax return.
Louisiana Accountant Pleads Guilty to Filing a False Income Tax Return
A press release issued by the Department of Justice on Tuesday, February 27, 2018 indicates that Deemer operated two New Orleans-based businesses prior to being charged: (1) Deemer CPA & Consulting Services LLC, an accounting business which Deemer operated “since at least 2009,” and (2) a daycare called Building Blocks Academy. The latter entity permanently closed its doors after Hurricane Katrina devastated New Orleans in August 2005 – which made Deemer’s inclusion of daycare-related business expenses on tax returns filed well after 2005 all the more confusing to the Internal Revenue Service (IRS).
Though DOJ records indicate that the defendant pleaded guilty to only one count of filing a fraudulent income tax return, the same press release also indicates that Deemer lied to the IRS on at least two occasions, “filing individual income tax returns that falsely reported… her expenses for Building Blocks Academy” for the 2009 and 2010 tax years. Deemer also roped her accounting business into the tax fraud scheme, “falsely reporting her Schedule C business income from Deemer CPA & Consulting Services LLC” on the same returns.
How Much Does Filing Schedule C Increase Your Risk of Being Audited by the IRS?
Perhaps it is unsurprising that Deemer attracted scrutiny from the IRS’ Criminal Investigation Division, considering the fact that the false information involved Schedule C income. In order to understand why, taxpayers need to have some background about IRS audit risk factors.
As sole proprietors should be made aware – particularly first-time business owners who may have limited tax experience – business income that is reported on Schedule C (Profit or Loss from Business (Sole Proprietorship)), which should be attached to Form 1040, 1040NR, or 1041, is a notorious trigger for IRS tax audits. But to what extent does the risk really increase?
According to the Better Business Bureau (BBB), the average audit risk associated with a federal personal income tax return hovers around 1%. However, that risk percentage can climb dramatically, in some cases seeing a staggering 12-fold increase, simply from filing Schedule C – which, unfortunately, is unavoidable for certain business owners. Using BBB figures, the extent to which the risk of an audit increases will depend upon how much revenue the business generates, as summarized below:
- If the sole proprietorship’s revenue is below $25,000, the risk of an audit generally increases by about 0.2%, climbing from around 1% to 1.2%.
- If the sole proprietorship’s revenue is between $100,000 and $1 million, the risk of an audit more than doubles, increasing from around 1% to 2.4%.
- If the sole proprietorship’s revenue is above $1 million, the risk of an audit can increase from 1% to as much as 12%.
Fortunately, there are steps that a sole proprietor can take to help decrease his or her risk of being examined by the IRS. For example, it may be beneficial to:
- Avoid, where practicable, making bank deposits just below the $10,000 mark, which may cause the IRS to suspect you of an offense called “structuring.” For more information on structuring and the dangers it poses for small business owners, see our previous article discussing this subject in depth.
- Claim less than 100% business use of your vehicle – especially if it is the only vehicle you own. It is helpful to keep records of how many miles you drove, on what dates, and why.
- Maintain detailed, meticulous records and receipts, particularly if you are claiming deductions for entertainment or meals, or if you are claiming the home office deduction.
Business Tax Attorneys Providing Accounting and Bookkeeping Services
In addition to being on probation for the next three years, Deemer must also pay combined fines and restitution totaling nearly $92,000. If you wish to avoid facing similar penalties, you must likewise avoid exaggerating your business expenses. You must also report your business income accurately, without concealing any of your earnings.
Unfortunately, this is often easier said than done. Even scrupulous, well-meaning business owners can become lost in the vast sea of tax regulations for sole proprietorships, corporations, limited liability companies (LLCs), and partnerships. Moreover, the recent federal tax reforms mean that even experienced business owners will be facing a new and unfamiliar set of tax laws this season.
Avoid incurring unnecessary penalties – and more importantly, avoid being charged with a tax crime – by filing your taxes with assistance from a knowledgeable business tax lawyer. Equipped with over 20 years of accounting, bookkeeping, and tax law experience serving a wide array of business entities, including domestic and foreign companies, the skilled and meticulous tax preparers at the Tax Law Office of David W. Klasing are ready to zealously meet all of your tax planning and bookkeeping needs. To discuss your tax matter in a reduced-rate consultation, contact the Tax Law Office of David W. Klasing online, or call us today at (800) 681-1295 to learn more about how we can help.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San Bernardino, Santa Barbara, Panorama City, and Oxnard! You can find information on all of our offices here.
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Here is a link to our practice overview video on warning signs that an audit has gone criminal.
What is an effective tax defense in an IRS eggshell tax audit?
https://www.youtube.com/watch?v=7qixPqWTtvA
So, you cheated on your taxes and you are under a tax audit…
https://www.youtube.com/watch?v=FZce4jqQJpI
Why should I hire a tax attorney to represent me in a tax audit?
https://www.youtube.com/watch?v=NDwc4GUfBX8
Foreign income and information non-compliance
https://www.youtube.com/watch?v=g2UlIE8oxPA
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