Having a good accountant can save you a lot of IRS troubles. The size of your refund should not be your criteria of evaluating your accountant. Because there are a lot of cases when the accountant without the client’s knowledge claimed bogus deductions.
Deductions Claimed With No Basis
You don’t want an accountant that claims your pet bulldog as a security expense, arguing it protected your home office. Or an accountant that lists your daily morning coffee as a stimulant necessary for work efficiency deductible as a utility. That was the case of Mr. C who claimed deductions that had no basis in fact. For example, for one client, who made approximately $103,000 in income, Mr. C claimed over $90,000 in deductions related to unreimbursed employee expenses.
Mr. C, who had graduated law school but who but repeatedly failed the bar exam, claimed deductions for his clients based on extreme and unsupported legal theories. He argued that expenses related to preventing an illness qualified as an “impairment related work expense.” He claimed the full value of his clients’ mortgage and utilities as long as the client had some type of Schedule C business to claim. When legally you can only claim the business portion of your home office expenses based on the square footage that you use exclusively and regularly for business. Another example of fraudulent deductions he used for his clients were invented unreimbursed employee expenses. On many occasions, he also filed tax returns on behalf of clients without their permission or knowledge.
Undercover Agent Sent By IRS
You can imagine that all these wild, fraudulent deductions generated all sorts of red flags in the IRS’ system. So, the IRS sent an undercover agent to catch this preparer.
The undercover IRS agent posed as a potential client. Mr C wanted a $5000 retainer to meet with the undercover agent. Instead, the undercover agent corresponded with Mr. C via email. Mr. C said that if the agent used another preparer, he would receive a refund of $373, but that if he used Mr. C, he would receive a refund of $6,007. Mr. C would take half, netting him $3,008. Two days later, Mr. C filed the undercover agent’s return, which claimed $29,339 in fraudulent deductions, including $2,400 in employee expenses, and 28,600 in other expenses that the undercover agent had never discussed with Mr. C or his employees.
According to evidence presented at trial, Mr. C engaged in a similar pattern with his other clients. When the victim- clients learned what Mr. C had done, many of them demanded copies of their tax returns. Mr. C refused to engage in conversation and even delayed providing returns for months at a time. And he often acted in a highly vindictive manner when questioned or challenged by clients or others. Often he berated these clients in emails, threatening legal actions. Or he filed amended tax returns, without clients’ permission or knowledge, that removed all deductions, causing the taxpayer-victim to then owe the IRS tens of thousands of dollars.
Conclusion
You have to be very careful when choosing your accountant. That’s because once the IRS flags an accountant for shady deductions, all the clients of that accountant have a higher risk of being audited by the IRS. In Mr C’s case many of the victim-clients have since been audited and/or filed amended returns, causing them significant financial hardship.
As to Mr. C he was convicted on May 24th, 2024 of 33 counts of tax fraud. He now faces up to 99 years in federal prison, three years per count.
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This material is for informational purposes only. It does not constitute tax, legal or accounting advice.