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Taxpayers and Preparers Beware: Audit Season is Coming

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April 16, 2015
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Taxpayers and Preparers Beware: Audit Season is Coming

As tax day has come and gone for most Americans, the unpleasant nature of tax season may be extended through a civil audit of your tax return. Every year, about 1.5 million tax returns are audited to ensure compliance. Although that number seems high, it actually only represents 1% of the tax returns filed in the United States every year. Many Americans go see a tax professional (usually a seasonal employee) to get their taxes prepared. Others attempt to take on the task own their own.

Regardless of the method of preparation, a taxpayer is responsible for the tax returns that they file. But what happens if your tax preparer, a professional that you trust, fudges your taxes? As a Texas couple that ran a tax preparation agency found out: they get to spend a hefty amount of their lives in a federal prison.

First, it is important to understand: not all tax preparers are crooks. In fact, most of them are extremely skilled and are very good at what they do. But like any profession, there are bad apples. But unlike every profession, when a job is done incorrectly with the intention of defrauding the U.S. government, a slap on the wrist is not likely to be sufficient. Unscrupulous tax preparers may fudge your return with or without your knowledge motivated by the belief that if they can generate higher refunds or lower balances due than the competition that they will have a more thriving business as a result.

Jacqueline and Gladstone Morrison were sentenced last month after they were found guilty of a myriad of tax-related crimes. The two operated Jacqueline Morrison & Associates in Arlington and Forth Worth between 2005 and 2010. Over the years, the Morrison’s created false expenses, claimed false deductions and credits and otherwise falsified thousands of tax returns. Because of their illegal activity, they had a booming business and collected over $2 million in fees over six year period that they were operating. In an attempt to grow their business even more, the Morrison’s applied for and received a franchise agreement from H&R Block.

A jury convicted both of the Morrison’s in October of last year and at their sentencing, they found out that they would treated to a stay at the not-so-luxurious Club Fed (federal prison) for 15 years each. In addition to the prison term, they were ordered to pay over $18 million to the Treasury in the form of restitution.

The timing of the sentence was likely not a coincidence. The IRS and Department of Justice find it effective to schedule their prosecutions and sentencing hearings in a way that will provide news of such convictions around tax time. They figure that if taxpayers see the potential penalties for falsifying returns or otherwise cheating on their taxes, they will be deterred from doing so. Although this is likely true, a large amount of taxpayers that are audited each year have either (1) nothing to hide or (2) have made a simple mistake without the intention to avoid paying taxes. This goes for tax preparers as well. As we mentioned above: mistakes are sometimes made and the reality is that sometimes the government will catch that mistake and induce a civil audit. The danger in an audit to a taxpayer is where the auditor interprets the actions taken to understate tax liability as willful tax evasion rather than mere negligence. Tax evasion is a felony punishable by jail time for both the taxpayer and preparer. Negligence in taken a position on a return, on the other hand, is punished via a civil penalty amounting to a mere 20% addition to the tax owed for the taxpayer and a possible preparer penalty for the tax preparer.

It is important (whether you are a taxpayer or a tax preparer) to have experienced representation with you during a civil audit where fraud may have occurred. Although many taxpayers or preparers have nothing to hide, trouble still may be looming during a civil audit. The revenue agents that conduct such examinations are trained to look for any inaccuracy in a tax return and even a simple mistake can result in significant inaccuracy penalties. Further, an accidental slip-of-the-tongue of a taxpayer or preparer could quickly turn a relatively simple civil examination into a criminal examination and investigation conducted by the IRS Criminal Investigation Division. As the Morrison’s learned last month (and will have the opportunity to think about over the next 15 years from behind bars) is that criminal investigations can escalate an investigation into something very serious, very quickly.

The tax attorneys and accounting professionals at the Tax Law Offices of David W. Klasing have a plethora of experience representing taxpayers in civil and criminal audits and investigations. In addition to representing taxpayers, our attorneys represent tax preparers in cases of fraud or other accusations of wrong-doing. Whether you are a taxpayer or tax preparer, if you are facing an audit or other investigation, remember that you do not have to go against the IRS or the Department of Justice alone. But also keep in mind: the longer you wait to seek representation, the harder it will for an experienced tax attorney to undo the statements that have already been made or protect evidence that has already been collected. Contact the Tax Law Offices of David W. Klasing today at 800-681-1295 or online for a reduced-rate consultation.