Ask The Edd Lawyer- If You Used A Corrupt Tax Return Preparer Are You Still Liable For Penalties

By Robert S. Schriebman

The U.S. Tax Court issued a decision in mid April 2014 affirming IRS accuracy-related penalties assessed as the result of the use of the services of a corrupt tax return preparer. The IRS assessed a stiff 20% accuracy-related penalty for two years of tax returns that were prepared by a tax return preparer who was subsequently convicted of crimes relating to the preparation of his clients’ tax returns. The taxpayer received substantial income from his consulting firm. He engaged the services of a preparer who created an elaborate scheme of bogus corporations to reduce the taxpayer’s taxable income to zero. The IRS audited both returns and disallowed the phony deductions and other items created by the corrupt preparer. The result of the audit was a stiff tax assessment together with a 20% accuracy-related penalty and daily accruing interest on all of this.

The taxpayer, who had worked for a number of businesses as an independent contractor, should have known that the preparer was incompetent. The tax savings obtained were extreme and unreasonable. The court found that the taxpayer actually sought a second opinion from a qualified CPA who advised him against using the preparer’s elaborate scheme. Instead, the taxpayer ignored the ethical advice of the CPA and went ahead with a bogus plan developed by the corrupt preparer. The preparer also charged the taxpayer a fee based upon the tax savings generated. This gave gave the preparer a conflict of interest in minimizing his client’s taxes. The taxpayer failed to establish reasonable cause for the abatement of the accuracy-related penalty.

It is a sure bet that the State taxing authority, such as the FTB, will follow the results of the IRS audit, disallow the bogus deductions and also assess the accuracy-related penalty.

It is an old story, one that we have all heard more times than we can count, “Oh what a tangle web we weave when first we practice to deceive.” In my opinion, the taxpayer is just as guilty as the tax return preparer who was convicted of tax crimes. He is lucky that the IRS was lenient and did not assess him the 75% civil fraud penalty.

The standard for abatement of tax return related penalties has always been “reasonable cause.” What does reasonable cause mean? If you exercised ordinary business care and prudence, not super human prudence, you have met the standard for reasonable cause. It is clear that the taxpayer in this example was just as much a crook as his preparer.

Another old saying goes like this, “If it looks too good to be true, it is not!” The taxpayer, in the case in point, had made substantial earnings as an independent consultant. When his taxes were reduced to zero, and his preparer was compensated on the basis of taxes saved, it was all too good to be true.

I have found the EDD, IRS, and FTB to be sympathetic if a taxpayer was abused by his or her professional. Kindness and compassion have been shown to my clients who were abused by theft by their payroll tax companies or by unscrupulous tax return preparers who created bogus deductions and stole their refunds. But when a taxpayer stands by and allows the preparer to fraudulently rearrange the chess pieces on the board and then cries for relief when caught, as they say in parts of New York, “Forget about it!”

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An EDD lawyer, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.

As a trusted EDD attorney, has successfully dedicated more than 30 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 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 and 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.