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Police Officers and Law Enforcement Officers Can Face Tax Audits and Civil/Criminal Tax Penalties Even When Using a Tax Preparer

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    Police officers, investigators, detectives, and other individuals who dedicate their life to carrying out a role in the criminal justice system are viewed as modern day heroes. The public relies on law enforcement officers to carry out their duties effectively and ethically. When the public comes to believe that a police officer may not be acting in the best interest of the town or community, significant efforts and energy can be expended to address the concern.

    Thus, police officers are held to an extremely high standard. When one considers the fact that police officers are responsible for enforcing the laws, it makes sense that officers would be held to at least the same standard as the public is where income taxes are concerned. Unfortunately, Law enforcement officers are held to a high standard when it comes to income tax obligations. In fact, the Standards of Conduct Model Policy written by the International Association of Chiefs of Police and issued August 1, 1997, states under section IV, Procedures, that“. . . officers shall not violate any law or any agency policy, rule, or procedure.” Officers who attempt to play fast and loose with their tax obligations can face an audit along with any accompanying exposure for prosecution for any tax crimes they commit.

    IRS Reports a Spike in Prosecutions of Tax Preparers Serving Law Enforcement Officers

    While many police officers try to do the right thing, and work with a tax professional to prepare their taxes, working with a tax preparer is not a guarantee that all questions of tax law will be appropriately handled. In fact, IRS Criminal Investigations (IRS-CI) has reported a spike in investigations and prosecutions against tax preparers who primarily market to and service police officers.

    While the criminal investigation may initially focus on the tax preparer, that doesn’t mean that the law enforcement officer will escape without, at a minimum, suffering through an embarrassing investigation and audit. Throughout the investigation process, the IRS agent is likely to raise questions probing to determine whether the police officer knew or should have known about the fraud. The investigator is also likely to determine the degree of participation, if any, of the officer.  This creates criminal tax exposure for the officer as well as the tax preparer.

    The fact of the matter is that taxpayers remain responsible for the information contained and set forth on their tax returns. When a taxpayer submits a tax return that contains incorrect or inaccurate information, he or she may be liable for an accuracy-related penalty under Section 6662 of the tax code. When it is believed that the taxpayer intentionally or voluntarily violated his or her tax duties, then more serious tax charges up to and including criminal tax evasion and a 75% civil fraud penalty can be advanced. Officers who are convicted of tax-related offenses are often subject to discipline up to and including dismissal from the force.

    The Danger of Unresolved Tax Issues

    One of the dangers of using a tax preparer that holds him or herself as a “specialist” in law enforcement officer taxes is the potential that he or she is engaging in improper actions to justify their lofty promises of large tax deductions. One common scheme by tax preparers involves mischaracterizing the officer’s expenses to reduce taxable income. The tax preparer may claim that “lots of police officers set up private security businesses” so no one will notice. However, in reality, the tax preparer may be “creating” a sham company solely to fraudulently reduce the individual’s taxable income.

    The issue with this type and many other types of fraudulent tax practices are that they are easily discoverable by the auditing revenue agent. When the IRS or Franchise Tax Board agent looks at your finances, he or she is simply going to follow the paper trail. If your tax and financial records raise red flags, it is highly likely that the agent will engage in a much more thorough review. If the agent believes that the law enforcement officer contributed or played a role in the tax fraud, the matter may be referred to the IRS or Franchise Tax Board Criminal Investigations Department.

    What Should Police Officers Do When they Face a Tax Audit?

    All tax situations and scenarios are different. However, it is wise for police officers and others to periodically get a second opinion on some of the tactics employed by their tax preparer. In light of IRS warnings that some unscrupulous preparers may be targeting law enforcement officers, this type of due diligence is essential. Similarly, if you have received a letter from the IRS regarding an upcoming audit, it is also wise to determine whether any underlying tax fraud issues exist before they are discovered at audit. If the Tax Law Offices of David W. Klasing is hired for this purpose and we discover criminal tax fraud exposure issues, we can work to develop an audit strategy likely to effectively mitigate the potential criminal tax consequences you face especially where your preparer is under criminal investigation.

    The Tax Attorneys, CPAs and EAs of the Tax Law Offices of David W. Klasing approach criminal tax exposure issues strategically. If you have concerns about aggressive or fraudulent tax positions taken by a preparer or are worried about an audit, we would be honored to assist. To schedule a confidential, reduced rate consultation please call 800-681-1295 or schedule online today.

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