Tax Problem Attorney Blog

Articles Posted in Tax Preparer Penalties

Taxes
Most accountants, CPAs, and certified tax preparers are honest, hardworking people who are dedicated to their profession. Most tax professionals simply want to secure the best possible tax deal for their clients while following all best practices regarding accuracy. However some tax professionals may over emphasize their ability secure favorable tax treatment for their clients and may cross the line into overly aggressive tax minimization strategies. Even more troubling, other tax preparers may be corrupted by greed and act dishonestly by improperly obtaining or using client tax refunds or other client funds.

If you are a tax professional, you already understand the devastating impact allegations of this type can have on your professional reputation and livelihood. Therefore any tax professional potentially facing an investigation or referral to the IRS Office of Professional Responsibility (OPR) should immediately retain tax counsel. However laypeople may not understand that mistakes or other improprieties found in tax filings are ultimately the responsibility of the filer.

#1 Tax Lady Indicted for Tax Fraud

tax preparer.jpgTax scams have likely been around for as long as taxes have been collected. In light of the significant penalties, fines, prison sentences and other consequences that can be imposed for tax non-compliance issues, taxpayers have good reason to be apprehensive or nervous if they are contacted by someone claiming to represent the Internal Revenue Service (IRS). Thus, if you are contacted by an IRS agent, it is always prudent to verify their identity, the fact that they are employed by IRS, and request a callback number at the IRS where the agent can be reached. Furthermore, if you are contacted by an individual claiming to represent the IRS or the US government, an experienced tax professional can often more readily recognize the signs of a tax scam.

At the Brager Tax Law Group we recognize that well-meaning taxpayers can face serious consequences if they are taken in by a tax scam. This post will identify and discuss a number of the more common tax scams and their consequences as identified by the IRS.

Tax preparer fraud can result in new tax problems

Our tax audits. The issue generally arises in closely held C corporations who pay out all of their profits as salary to the shareholders, rather than allocating any portion to dividends. The advantage is that salaries are deductible–dividends are not. An IRS tax audit can, however, result in the IRS denying a portion of the salaries as not being an ordinary and necessary business expense pursuant to tax attorneys that the CPA firm relied on the many individual employees of the firm who were “knowledgeable in income tax matters.” He wrote “… there was conflict in this case: taking advice from oneself.” But Judge Posner didn’t stop there. First he badmouthed the firm’s tax lawyers:

Remarkably, the firm’s lawyers (an accounting firm’s lawyers) appear not to understand the difference between compensation for services and compensation for capital, as when their reply brief states that the founding shareholders, because they “left funds in the taxpayer over the years to fund working capital,” “deserved more in compensation to take that fact into account.” True–but the “more” they “deserved” was not compensation “for personal services actually rendered.” Contributing capital is not a personal service. Had the founding shareholders lent capital to the company, as it appears they did, they could charge interest and the interest would be deductible by the corporation. They charged no interest (emphasis in original).

Not content with leaving it there Judge Posner finished up as follows:

We note in closing our puzzlement that the firm chose to organize as a conventional business corporation in the first place. But that was in 1979 and there were fewer pass-through options then than there are now; a general partnership would have been the obvious alternative but it would not have conferred limited liability, which protects members’ personal assets from a firm’s creditors.

Why the firm continued as a C corporation and sought to avoid double taxation by overstating deductions for business expenses, when reorganizing as a passthrough entity would have achieved the same result without inviting a legal challenge [citation omitted] is a greater puzzle.

The Tax Court was correct to disallow the deduction of the “consulting fees” from the firm’s taxable income and likewise correct to impose the 20 percent penalty. That an accounting firm should so screw up its taxes is the most remarkable feature of the case.

OUCH!
Continue reading

San Diego tax attorney Scott Waage was enjoined from preparing tax returns or giving tax advice pursuant to an injunction entered by a federal district court. The injunction had been sought by the Department of Justice in a complaint filed in the Southern District of California pursuant to Internal Revenue Codes Sections 7401, 7402 and 7408.

In its complaint the Department of Justice alleged that tax lawyer Waage along with CPA Robert O. Jensen promoted tax fraud schemes to clients that illegally reduced the client’s reported income by, among other things, using sham consulting companies, and illegally structured employee benefit and pension plans. According to the complaint, Waage operated under the names of “The Tax Advisors Group, Inc.” and “Pensions by Design.” Apparently in his promotional materials tax lawyer Waage referred to himself as a “visionary tax attorney,” and a seasoned tax litigator. Currently if you try to click on Waage’s website at www.strategiclawgrouppc.com a message pops up that the site has been “disabled.”

According to the Department of Justice press release CPA Jensen had been enjoined in March from preparing tax returns that understate income. It makes one wonder why the Department of Justice needed an injunction to prevent CPA Jensen from preparing tax returns that understate income! I always assumed that CPAs (as well as tax lawyers and enrolled agents for that matter) were already not supposed to understate income. Still the IRS uses the injunction process as a convenient, and relatively quick method of putting a tax preparer out of business; and sometimes as an alternative to a criminal tax prosecution. However, in some cases the IRS uses an injunction as a stop gap measure while it puts together its criminal tax case.

Tax attorney Waage is apparently no stranger to IRS tax problems. According to a summons action filed against him in 2008, Waage’s law firm was under investigation for its federal income tax liabilities. U.S. v. Waage.

The injunction order against Waage also requires him to provide the IRS a list of his clients that have used his services since 2001. It is likely that those clients will be receiving tax audit notices from the IRS in the not too distant future. Even though the normal statute of limitations for income tax returns is only 3 years, in the case of tax fraud the statute of limitations is open indefinitely, and there is case law supporting the view that tax fraud includes tax fraud by the tax return preparer, nor merely the taxpayer.
Continue reading

Thumbnail image for 1125087_person_jail.jpgThe convictions of a couple that committed tax fraud were affirmed by the Fifth Circuit Court of Appeals. The husband and wife were the owners and operators of a firm that prepared personal income tax returns in Texas. Donald Womack misrepresented himself as an accountant who has previously worked for the IRS. His wife, Tonya, helped Mr. Womack with the business. Her role progressed until she began filing clients’ returns with the IRS electronically. The couple used the same electronic filing identification number (EFIN).

The IRS first noticed the Womacks based on the unusual deductions that were claimed on their clients’ returns. Several of the Womack’s clients testified against the couple, including one man who testified that Mr. Womack offered to provide false mileage logs to substantiate vehicle mileage deductions. Other former clients stated that they had never given the Womacks any information that would support the deductions that the couple claimed, such as charitable or mortgage-interest deductions. These clients are probably lucky they didn’t get charged with tax evasion themselves!

The government also used an undercover IRS special agent, who brought in his tax information to the couple. Although he had calculated that he owed $300, the Womacks gave him a choice of three tax refund amounts, ranging from $3,200 to $4,200. Mrs. Womack claimed that, although she had taken a tax preparation course, all of her errors were accidental. Mr. Womack did not offer any theory as to the cause of his inaccuracies.

A jury indicted the couple on 26 counts of conspiracy and aiding and assisting in the preparation of false tax returns. Mr. Womack was ordered to serve five years in prison, plus three years of supervised release. Mrs. Womack got off with three years of prison time, plus three years of supervised release. The court also ordered them to pay over $160,000 in restitution. This is over and above any civil tax preparer penalties that may be assessed against them under Internal Revenue Code (IRC) Section 6694.The Fifth Circuit affirmed their convictions in an unpublished opinion.
Continue reading

The IRS’ tax lawyer, who failed to disclose multiple conflicts of interest.

533138_law_and_order.jpg

While having an attorney-client relationship with the benefit plan’s promoter, the tax attorney wrote several opinions for prospective plan participants. These opinions pertained to a benefit plan’s qualification under Internal Revenue Code section 419A. The tax lawyer later became a co-trustee of the plan, and during his tenure, he represented individual participants before the IRS concerning their tax problems. The plan’s promoter was paying him throughout this time.

The tax attorney, who was not identified, never advised any of his clients of the conflicts and failed to obtain informed consents from any of the parties involved. The conflicts arose when the attorney agreed to represent multiple parties with opposing interests, to become the co-trustee of the plan and to receive compensation from the promoter. His obligations to other parties and his own self-interest limited his ability to represent each of his clients successfully. Because they were unaware of the conflicts, the clients were unable to seek alternative legal counsel.

The attorney has agreed to cooperate in the investigation, recognized his violations and will take additional continuing education ethics classes over the next two years. The IRS’ OPR Director Karen L. Hawkins reminded attorneys that informing clients of conflicts of interest “is not a mere nicety.” She continued, “Taxpayers who pay handsomely for tax advice and representation have a fundamental right to expect competent and diligent representation unfettered by a practitioner’s responsibilities or obligations to someone else, or by the practitioner’s self-interest.”

Those who violate Circular 230 are subject to monetary penalties, censure, suspension and disbarment. Not just tax attorneys, but also enrolled agents, and CPAs are subject to the provisions of Circular 230, and therefore must avoid representing conflicting interests, unless appropriate conflict waivers are obtained.
Continue reading

The UCLA Tax Controversy Institute is the preeminent conference in the United States dedicated to tax controversy and tax litigation. This year it will be held on Tuesday, Oct. 25th beginning at 8:30 AM. This year IRS speakers include:

• Sandra Brown, Chief, Tax Division, United States Attorney’s Office (C.D. Cal.)

• Deborah Butler, Associate Chief Counsel, Procedure and Administration, IRS, Washington, D.C.

The IRS Office of Professional Responsibility (OPR) alleged that Joseph Kozelsky did not file timely tax returns for 2001 through 2007 and did not timely pay his federal tax liability. As a result of his tax problems he was disbarred from practice before the Internal Revenue Service. Mr. Kozelsky didn’t help himself very much, since he failed to respond to the IRS’s complaint within 30 days. As a result the facts alleged by the IRS were deemed admitted, and the administrative law judge (“ALJ”) issued an order that Mr. Kozelsky engaged in disreputable conduct and should be disbarred.

The IRS publishes rules for professionals practicing before the IRS, and those rules are set forth in Circular 230. We have previously published an article on the procedures involved in an OPR disciplinary matter. Circular 230 includes rules for individuals preparing tax returns, providing tax advice, and representing individuals before the IRS. Failure to timely file tax returns constitutes disreputable conduct under Circular 230 and subjects the offender to sanctions. In the case of Mr. Kozelsky, the IRS proposed disbarment from practice before the IRS and the ALJ presiding over the case agreed and ordered disbarment on November 17, 2010 since Mr. Kozelsky failed to respond to the OPR’s complaint.

If no appeal is filed within 30 days of the ALJ’s default order, the default order becomes final. Since Mr. Kozelsky appealed the ALJ decision to the IRS’s Appellate Authority on December 23, 2010, 6 days after the 30 day deadline, his appeal was not considered, and his disbarment became final.

Enrolled Agents are subject to the same Circular 230 rules as CPAs, and in a separate case, an Enrolled Agent was also disbarred from practice before the IRS. OPR filed a complaint against Susan Tomsha-Miguel alleging her failure to file timely tax returns, she failed to respond within 30 days, and the ALJ presiding over the case entered a default judgment for the IRS. The ALJ determined that the appropriate sanction was disbarment from practice before the IRS. In addition to CPAs and Enrolled Agents, Circular 230 rules and sanctions regarding failure to file tax returns also apply to tax attorneys (see post titled “Attorney Disbarred under Circular 230 Rules for Failure to File Tax Returns”).
Continue reading