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ASK THE EDD LAWYER – FRAUDULANT TAXPREPARERS AND FRAUDULANT TAX SCHEMES – PART II: YOU ARE RESPONSIBLE!

By Robert S. Schriebman
April 20, 2016

Introduction

This is Part II of a 2-part series discussing the dangers of using an unethical return preparer to prepare tax returns. I am not speaking solely of individual or personal income tax returns. The same advice applies to filing false or misleading corporate income tax returns and payroll tax returns with either the IRS, FTB or EDD. This advice also applies to the filing false or misleading sales tax returns with the BOE.

In Part I we learned that close to $16 billion has been diverted to crooks. One of the biggest issues facing Congress and the IRS these days is the acknowledgement that we may be losing the battle of Cybersecurity.

I gave you a list in Part I of the current fraudulent schemes that are on the IRS radar.

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.

Focus On California – The Barnes and Siegel Cases

California has always been fertile ground for all kinds of tax abuse, phony tax shelter schemes, and a breeding ground of tax crooks. The cases of Barnes and Siegel, both very recent cases, prove the point.

United States v. Elton L. Barnes, No. 2:14-cv-05621 (C.D. Cal.) In Barnes a federal judge barred a return preparer who caused his client’s tax refunds to be deposited to bank accounts in his name only. The lesson in Barnes is clear. Never sign a blank return or any blank tax form whatsoever. Read the return very carefully. Make sure that you get the refund that is coming to you. Remember, you are responsible for what is in your tax return. If your preparer embezzles your refund, don’t come crying to the IRS or FTB.

On the topic of embezzlement, I am reminded of a recent matter, in my office, where the owner of several prosperous fast food outlets hired an independent firm to take care of his payroll tax compliance. Over a period of several years, the payroll company embezzled hundreds of thousands of payroll tax dollars. Of course the payroll company had all EDD and IRS correspondence sent to them. My client did not know the severity of the problem until the EDD came knocking at his door to collect the back taxes. In addition to the taxes being owed, there were also about 40% additional penalties and interest. Both the EDD and the IRS abated penalties for only the first year the embezzlement occurred. For the following years, both the EDD and IRS took the position that my client should have realized the problem, fired the old payroll company, and hired a reputable payroll company for compliance. The old payroll company? Gone with the wind…

United States v. Lawrence Preston Siegel, No. 3:15-00643 (S.D. Cal.) In Siegel a return preparer falsely characterized designer clothing purchases as deductible "medical expenses." It was clear that purchases from Tiffany & Co. Louis Vuitton and Royal Caribbean Cruise Lines were not medical expenses. A federal judge permanently barred Siegel from preparing returns or from providing tax advice.

Surely, the taxpayer signing this phony return knew or should have known that the medical expense deductions were false. When audited by the IRS and FTB, the taxpayer pointed the finger of blame at Siegel. This did not help. That taxpayer was responsible for what was in the return. One of the most common dishonest preparer practices is to prepare returns that include non-existent itemized personal or business deductions.

The practice of the IRS and the FTB, after shutting down the preparer’s operation, is to audit the returns of each and every one of his or her clients.

The Department of Justice Acts To Close Down Bogus Tax Schemes

The Tax Division of Justice is responsible for suing to shut down alleged tax schemes. In the case of U.S. v. RaPower-3 LLC et al., No. 2:15-CV-00828 (D.Utah), the federal government filed a complaint to shut down RaPower for selling "solar thermal lenses" and telling their customers that they were entitled to claim depreciation expenses and the solar energy credit. RaPower had reason to know that its customers were not in the business of producing and selling solar energy and that, in reality, no solar energy was produced that complied with the Internal Revenue Code.

Starting in the late 1980s the IRS began a campaign to shutdown bogus tax shelter schemes and to disallow credits and deductions taken on investors tax returns. This campaign reached its peak in the 1990s. Many IRS challenges took many years to resolve; a few cases took decades to resolve. However, the unfortunate investors had to pay not only back taxes, but daily compounding interest – you can only imagine the economic devastation brought about by these phony investments.

U.S. v. James Tarpey et al., No. 2:15-cv-00072 (D.Mont.) In this case, Tarpey concocted phony charitable contributions by having their customers create phony "rights" in a timeshare and donating those rights to a "cause." The cause was a tax exempt entity created by Tarpey. Tarpey then created an appraisal that grossly overvalued the donated timeshare rights, allowing their clients to claim large charitable contribution deductions. In reality the "rights" had little or no value at all. The Justice Department asked the federal judge to close Tarpey down. I am sure the IRS is going to go after each and every Tarpey investor.

The Tarpey matter brings to mind a young lady client who hired a preparer who created phony charitable deductions on her returns for several years. The preparer, under IRS investigation, disappeared – no address and no phone. Needless to say she was audited by the IRS. It was a very dicey task to convince the IRS not to charge this young lady with criminal tax fraud. The FTB also got their fair share.

Conclusion

Please remember that you, as the taxpayer, are ultimately responsible for what is on your tax return. You are the one audited by the IRS and FTB. It will do you no good to point the finger of blame at your preparer. Sure, there are stiff preparer penalties that will be assessed against and paid by the crooked preparer. He or she may even be put out of business. But the ultimate axe of taxes, penalties and daily compounded interest fall on you. You may also get on the IRS and FTB radars for future audits. Remember that the odds of being audited are 100% when your return is selected. Chose your preparer wisely.

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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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