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ASK THE EDD LAWYER - FRAUDULANT TAXPREPARERS AND FRAUDULANT TAX SCHEMES - PART I: YOU ARE RESPONSIBLE!

By Robert S. Schriebman
April 14, 2016

Introduction

This is Part I of a two-part series that will discuss how the IRS and the Department of Justice are coordinating their efforts to protect the public from fraudulent preparers and phony tax schemes. In Part I we will take an overview of what is currently on the government radar targeting fraudulent preparers and schemes. In Part II we will look at past and current efforts to close down these operations and the schemes undertaken by these people who victimize the American taxpayer.

You Are Ultimately The Responsible Party

Under the tax law it is you who will be held responsible if you hire the wrong tax preparer. You will be ultimately held responsible if that preparer put you in harm's way by preparing a false return containing phony deductions, phony credits, and the failure to report your income or payroll taxes properly. Just about everybody who is audited or investigated points the finger of blame to the tax preparer or tax advisor. Believe me the IRS, FTB and EDD has heard it all.

You will have to pay the penalties, additional tax, and interest when the IRS, FTB or EDD challenges your return. If you have allowed your tax preparer to take possession of your refund check, never to see it again, that is your fault too. Don't complain to the taxing authorities about being the victim of embezzlement; you chose your tax advisor.

This article will discuss the recent IRS Press Release issued on April 1, 2016 and will set forth some of the most common fraudulent schemes and practices currently on the IRS radar.

The Justice Department Has Some Good Advice For You

The IRS, in conjunction with the Department of Justice, issued ARD 065-8 on April 1, 2016. Acting Assistant Attorney General Caroline D. Ciralo of the Tax Division spoke on behalf of the Department to tell us that in the 2014 IRS filing season over 2.1 million tax returns claimed fraudulent refunds and robbed all of us of $15.7 billion. (As a retired military JAG, that's $15.7 billion that could have gone to defend this nation or to protect our troops.) So far the Justice Department has only been able to shut down thirty five fraudulent preparer operations. The government has admitted to losing the battle of Cybersecurity; the topic of another article.

It happens every year, human greed gets the best of us. We think we are getting a good deal when we hire a preparer who tells us, behind closed doors, that the IRS audits less than 2% of tax returns so the odds of getting caught are very small. Let's face it, if you're the one who gets caught by the IRS, FTB or EDD, the odds are 100% against you! Don't play the odds.

Run away from any preparer who want to create phony business expenses or charitable contributions, or who wants to claim phony tax credits, such as the child care credit, the education credit or the earned income credit. Avoid any preparer who wants your refund sent to him or her directly.

Major Fraudulent Schemes And Practices To Avoid

The IRS Press Release listed several fraudulent schemes and practices that are currently on their radar. These are as follows:

  • Fabricating fake Form W-2 (Wage and Tax Statement) information
  • Claiming bogus education and first-time buyer credits
  • Claiming phony child and dependent care credits or residential energy credits
  • Claiming fraudulent fuel tax credits
  • Falsely exempting foreign earned income
  • Inflating unreimbursed employee business expense deductions
  • Fraudulently inflating or decreasing a client's income or deductions to maximize the Earned Income Tax Credit

In my practice I have represented clients who are the victims of unscrupulous preparers. Some of the most common schemes have been phony charitable contribution deductions, inflating business related travel and entertainment expenses, and phony hobby losses; that is to say taking a person's hobby as a business. For example, a prominent local city official had a hobby of restoring vintage cars. His preparer took those expenses as deductible residential real property rental expenses. My client knew this was going on, but liked the sizable refund check he received every year - that is until the IRS wanted to examine his last three years of tax returns. There was no place to hide.

Conclusion

The taxpayer is ultimately responsible, and bears the consequences of his or her choice of a return preparer or tax advisor. When you are caught by the IRS, FTB or EDD, pointing the finger of blame at your tax advisor is not going to cut it. You are ultimately responsible for the correct tax, penalties and interest. Sure, your preparer faces his or her own IRS and FTB preparer penalties, but that's the preparer's headache not yours. The EDD doesn't care who prepared the return. The employer is always ultimately responsible.

In Part II we will look at current efforts to close down these operations and the schemes undertaken by these people who victimize the American taxpayer.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

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