Tax Preparer Errors or Fraud: Innocent Taxpayer Suffers

My previous article reviewed the various tax statutes of limitations that prescribe the period of time the Internal Revenue Service has to audit a taxpayer and assess further taxes. The SOL simply does not begin if a tax return is false or fraudulent or if there is a “deliberate” attempt to evade taxes. This means the IRS can look back as far as it wants, no matter how long ago the tax return was filed.

While forever is a long time, what happens if the fraud is committed not by the taxpayer, but by the return preparer who incorporated the fraud into the tax return without the taxpayer’s involvement? Is the taxpayer still on the hook? Unfortunately, the IRS and the courts have punished innocent taxpayers for the wrongdoing of others to whom they entrusted their tax returns.

The Tax Court recently upheld its previous ruling on this SOL issue when the fraud was committed by the preparer of the return. In Murrin v. Commissioner, TC Memorandum. 2024-10 (January 24, 2024) the IRS successfully defeated the SOL, going back almost 20 years since tax returns were filed. The IRS simply relied on the open-ended SOL that applies in cases of fraud or deliberate tax evasion. The taxpayers did not intend to evade taxes, but unfortunately their tax return preparer did and, to that end, included false or fraudulent information on their tax returns. The Tax Court determined that this was sufficient for SOL to remain open indefinitely.

Fraud and the US International Tax Return Preparer

A self-described “international tax expert” was convicted in May 2024 of 33 counts of tax fraud as a result of filing fraudulent tax returns in the United States for hundreds of clients around the world. According to the U.S. Attorney’s Office (ND Texas), although this individual had described himself as an attorney, he had never passed the bar exam and had never been licensed to practice law in any state. In addition to claiming fraudulent deductions on his clients’ tax returns, he often filed these returns without their knowledge or permission.

While he faces a possible 99-year prison sentence, the real victims are the taxpayers who relied on the claims of his international tax expertise to their complete detriment. They now face IRS audits, penalties, filing amended tax returns, and experiencing significant emotional turmoil and financial hardship.

Five red flags

When a tax return preparer commits fraud, it typically involves the preparer knowingly filing hundreds of tax returns claiming deductions to which taxpayers are simply not entitled. These can take the form of false medical expenses or mortgage interest deductions (even when the taxpayer is not a homeowner), false dependency claims, and more.

Here are some red flags to watch out for:

• The taxpayer is not required to submit proof of earnings, deductions or credits.
• The taxpayer is asked to sign a blank or partially completed tax return, or the return is completed in pencil. Remember, taxpayers are responsible for the final tax return submitted to the IRS, even if the preparer later changes the information after the taxpayer has signed. The taxpayer should not feel pressured or rushed to sign the return and should carefully verify all information before signing.
• Return preparer fees are based on a percentage of the tax refund.
• The refund payment is directed to a bank account over which the taxpayer has no control.
• The return preparer reacts in a threatening or reprimanding manner when the taxpayer asks or questions him or her about the return or the positions taken on it.

US International Tax Returns Require Great Care

What should taxpayers pay attention to when hiring a US international tax professional? Simply put, due diligence is the order of the day. Check credentials carefully, ask questions, and then ask more questions. If the advisor lacks the U.S. international tax experience necessary for the particular case, the taxpayer’s reliance on tax advice may not be considered “reasonable,” meaning that if errors are made, courts will uphold tax penalties imposed by the IRS. .

When it comes to US international taxes, the issues are quite complex. While most tax professionals are honest people, many may claim to have the experience necessary to help American taxpayers who live abroad or own assets abroad, but often this is simply not the case. The temptation to blindly trust the tax professional may be more pronounced when the tax issues are complicated, as is typical for an American with foreign interests. The tax professional should have significant experience with “controlled foreign corporations”, “passive foreign investment companies”, “GILTI”, foreign trusts, foreign tax credit rules, foreign financial assets, to name just a few. The US-based tax professional may not see these cases regularly, if at all. Getting cheap tax help is not a panacea when the tax issues are complex, as is often the case when dealing with US foreign or international tax issues.

Unfortunately, as in the case of fraud, the SOL will not begin to apply if the taxpayer fails to file certain foreign-related information returns. Therefore, it is not enough to have an honest preparer. The effect of having a return preparer who lacks the relevant international experience can result in the same unlimited SOL if things are not done right.

Pay attention; be careful out there.

Contact me at [email protected]

Submit a note about an area of ​​tax you would like me to write about.