Recently in Tax Preparer Penalties Category

CPA Firm Dissed by 7th Circuit Court of Appeals

November 12, 2012,

Our tax lawyers have represented a fair number of clients in the Tax Court, and before the IRS in so-called unreasonable compensation 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 IRC Section 162.

That's what happened in Mulcahy, Pauritsch, Salvador & Co. v. Commissioner (7th Cir. 2012). Mulcahy et. al. is a medium size accounting firm in Illinois. According to its website the firm provides a variety of services including income tax preparation for all types of businesses and individuals, IRS and State tax audit representation, payroll reporting, QuickBooks setup support and training, business startup services, monthly bookkeeping and financial statements.

The Mulcahy firm appealed the IRS decision by filing a Petition with the United States Tax Court, and when it lost there they appealed to the 7th Circuit Court of Appeal hoping no doubt for a better result. After an analysis of the tax law, and the facts Judge Posner of the 7th Circuit decided against the CPA firm, and upheld the imposition of the 20% negligence penalty. Judge Posner rejected the defense to the penalty advanced by CPA firms 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.


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California Tax Lawyer Enjoined From Providing Tax Advice or Preparing Tax Returns

October 10, 2012,

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 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.

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Preparers' Tax Fraud Affirmed by the Fifth Circuit

August 6, 2012,

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.

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Internal Revenue Service's Office of Professional Responsibility (OPR) Censures Tax Attorney

July 19, 2012,

The IRS' Office of Professional Responsibility (OPR) recently censured a tax lawyer, who failed to disclose multiple conflicts of interest.


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.

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Tax Attorneys , CPAs, IRS Officials Speaking at UCLA Tax Controversy Institute on Tuesday, Oct. 25, 2011

October 22, 2011,

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.
• Faris Fink, Commissioner, Small Business / Self-Employed Division, IRS, Washington, D.C.
• Victor Song, Chief, Criminal Investigation, IRS, Washington, D.C.
• Chris Wagner, Chief, National Office of Appeals, IRS, Washington, D.C.

Dennis Brager of Brager Tax Law Group, A PC will be one of the many private practitioners including tax lawyers, CPAs, and Enrolled Agents who will be sharing the platform with IRS officials. Dennis will be speaking on the following panel:

E-Filers Beware

Ongoing examinations of E-Filers are intended to ensure that they are in compliance with all of the E-filing rules. In the event the tax practitioner is determined by the IRS agent to be in non-compliance, the IRS may sanction the tax practitioner which sanctions can run from a written reprimand to suspension to even expulsion.

This panel will discuss the IRS audits of E-Filers, the process of imposing sanctions and what steps practitioners should take to minimize sanctions and avoid them in the future.

For registration information click here.

Brager Tax Law Group, A P.C. is also a sponsor of this year's UCLA Tax Controversy Institute, and Dennis Brager is a member of the planning committee.

OPR (Office of Professional Responsibility) Disbars a CPA, and an Enrolled Agent under Circular 230 for Failure to File Tax Returns

August 3, 2011,

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").

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IRS Files Summary Judgment in FBAR Case

October 29, 2010,

In mid-October the IRS filed a summary judgment motion seeking FBAR (Foreign Bank Account Report, Form TDF 90-22.1) penalties of over $225,000 for a civil failure to file an FBAR. This is only the second civil FBAR case that I am aware of which didn’t involve an underlying non-tax crime. According to District Court documents Jon McBride held offshore accounts totaling in excess of $1,000,000. The case was filed in Utah in April of 2009, but the IRS had assessed the FBAR penalties about 18 months earlier. The facts, at least as recited by the IRS in its motion, are problematic for the defendant. Allegations include:

* Offshore Entities Set Up by a Firm which in its brochures specifically advised of the requirement to file an FBAR

* Funneling of Corporate Earnings Back to McBride and Others through the Use of Loans and Other Devices

* McBride was advised by a Financial Consultant in writing that the Use of the Offshore Entities were Problematic, and gave him an article describing offshore bank scams.

* McBride’s accountant provided a declaration that he had “discussed the FBAR filing requirement” and asked whether McBride had any offshore accounts.

* When questioned by an IRS Revenue Agent about offshore accounts McBride denied using them.

Sounds like McBride will have a tough time of it, although he hasn’t yet filed his opposition papers so we don’t know about his side of the story.

If you have offshore financial accounts, and are considering a voluntary disclosure contact the tax litigation attorneys at Brager Tax Law Group, A P.C.

IRS Says it Will Subpoena CPAs

May 21, 2010,

A couple of weeks ago I was at the ABA Tax Section Meeting which as I mentioned previously gathered tax lawyers from around the country. Since I spent most of my time at meetings involving FBARs (Foreign Bank Account Report TD F90-22.1), I missed another meeting. It turns out that (according to published reports) Janet Johnson, the Internal Revenue Service deputy division counsel for criminal tax stated that that the IRS Criminal Investigation (CI) unit would subpoena accountants in criminal tax cases. By itself that’s hardly surprising since criminal tax attorneys have known for many years that IRS special agents routinely interview the tax preparer, and the accountant can wind up as the lead witness against his own client.

The part that was surprising was that she stated the government would issue a grand jury subpoena even to a Kovel accountant, i.e. one that was retained by a tax attorney for the purpose of assisting the tax attorney in advising the client.

In an ominous note Johnson stated , “Whether or not that accountant comes to testify can be very serious for the accountant. The grand jury may decide he is part of the problem.”

If you have a tax problem, or are a CPA who has a client with a tax problem feel free to contact the tax lawyers at Brager Tax Law Group, A P.C. for a consultation.

FBARs and More FBARs

May 11, 2010,

I just returned from an ABA meeting of tax lawyers in Washington, D.C. It seemed like all of the tax attorneys (or at least the tax litigation attorneys) could find nothing to talk about, but Foreign Bank Account Reports, i.e. TDF 90-22.1 (FBARs),voluntary disclosures, and offshore bank accounts. Over a period of two days I spend at least 8 hours in formal meetings with other tax lawyers talking about FBARs, and more hours over drinks and food talking about FBARs. The main theme was that the rules surrounding tax amnesty are being enforced more harshly than many tax attorneys had hoped would be the case. A few highlights of what I heard, the good, the bad, and the ugly:

• 225 revenue agents have been assigned to conduct civil tax audits in voluntary disclosure of offshore bank account cases
IDRs (Information Document Requests) can be expected in most offshore bank account cases within the next few weeks
• The goal of IRS management is to close a “substantial portion” of the tax audits by the end of 2010
• IRS has started to identify taxpayers who made quiet voluntary disclosures of their offshore bank accounts, and these cases will be worked as “full blown” civil tax audits—meaning these taxpayers are potentially subject to multiple 50% FBAR penalties
• It is too soon to tell how post Oct. 15th voluntary disclosures will be treated for civil tax purposes—speculation continues to center on 25 to 35 per cent
• IRS has rolled out a “third generation” IDR which the IRS believes is more streamlined
• Basis issues will be negotiable, i.e. if basis information is unavailable revenue agents will likely accept reasonable alternatives, e.g. value security as of 1/1/2003
• Even if a timely 2008 FBAR was filed, if the highest offshore bank account value was in 2008, the 20% penalty will be calculated based upon 2008 value
• Revenue Agents do not “currently” have the authority to waive de minimus violations – there is no such thing as being half pregnant.

If you have a foreign financial account call the tax litigation lawyers at Brager Tax Law Group, A P.C. to get more information on voluntary disclosures and FBARs.

UBS FBAR Indictment Illustrates Tax Problems Exacerbated by Lack of Attorney Client Privilege

May 3, 2010,

Disbarred New York attorney Kenneth Heller was among 7 UBS clients charged a few weeks ago with failing to file Foreign Bank Account Reports, TDF 90.22-1 (FBARs), and tax evasion as a result of failing to report his Swiss bank accounts to the IRS. The case would be just one more in a string of FBAR and tax fraud criminal tax cases, but something in the complaint caught my eye. Some of the records that the IRS Criminal Investigation Division used to prepare its tax fraud case against Heller were obtained from Heller’s tax preparer—both documents and through an interview of the tax preparer. The records included instructions to the tax preparer to go to Switzerland to review the offshore bank account records. There was also a letter from the tax preparer to Heller reminding him that he had to report the income from the Swiss bank accounts.

This illustrates a vital point that as a tax controversy lawyer I remind clients about all the time. In a criminal tax case many times the first witness is the client’s tax preparer. There is no accountant client privilege in a criminal tax fraud case! Had these communications been between Heller and his tax attorney it is likely that the attorney-client privilege would have shielded them from IRS . While the IRS might have been able to bring a tax evasion case without the tax preparer the statements by the tax preparer will no doubt be extremely damaging.

If you have a tax problem including unreported offshore financial accounts contact the tax controversy lawyers at Brager Tax Law Group, A P.C.

IRS Office of Professional Responsibility (OPR) Issues Penalty Guidelines

June 11, 2009,

In May, the IRS Office of Professional Responsibility (OPR) issued penalty guidelines, sometimes referred to as a “penalty grid” for imposing penalties on tax preparers, and others who are tax attorneys, CPAs, or enrolled agents who fail to file timely income tax returns. The late filing of an income or employment tax return by a CPA, tax attorneys, or enrolled agent is considered a violation of IRS Circular 230, punishable by suspension from practice before the IRS. The guidelines issued by OPR first point out that sanctions are determined on a fact specific basis, and the penalty grid is not intended to establish a rigid standard. The guidelines including the actual penalty grid made be found at the OPR website.

The penalty grid imposes a guideline penalty of two to four months for each late filed tax return, even though no tax was due. If the tax return is still not filed at the time OPR contacts the tax preparer then the guideline is four to six months for each non-filed tax return. If the late filings continue for four or more years than the baseline can be doubled! Thus a simple late filing of tax returns for four years can result in a suspension from practice for 32 months even though no tax is due.

If you are CPA, tax lawyer, or enrolled agent who has not filed his tax returns you have a serious tax problem, and you may wish to contact the tax controversy attorneys at Brager Tax Law Group, A P.C.

IRS Office of Professional Responsibility (OPR) Has New Director

March 17, 2009,

Effective April 1, 2009 the Internal Revenue Service (IRS) Office of Professional Responsibility (OPR) will have a new Director— tax controversy attorney Karen Hawkins, Esq. Having known Karen professionally for a number of years I am confident that she will bring a well needed dose of practicality to OPR. Karen has worked tireless in many areas of tax litigation including most notably the innocent spouse arena where she successfully persuaded Congress to pass legislation clarifying (someone would say expanding) the availability of judicial review for innocent spouse cases under IRC Section 6015(f).

OPR has the responsibility for enforcing standards of competence, integrity and conduct for tax attorneys, CPAs, and enrolled agents who practice before the IRS. It enforces Circular 230, the rules and regulations which govern tax lawyers, CPAs, enrolled agents and others who practice before the IRS. Tax lawyers, CPAs and enrolled agents who violate Circular 230 are subject to discipline which may include suspension of practice before the IRS, and/or monetary fines.

Tax practitioners may run afoul of OPR if, for example, tax preparer penalties are imposed against them pursuant to IRC Section 6694 which provides for monetary penalties against tax preparers for various types of incorrect tax returns. Sometimes tax preparers agree to pay what in some instances is a small penalty under IRC Section 6694 rather than fight to have it set aside. This is generally a mistake since agreeing to an IRC Section 6694 penalty will almost always lead to an investigation by OPR, and possibly a suspension from practice.

If you are a tax preparer, tax lawyer, enrolled agent, or CPA facing tax preparer penalties, or in investigation by OPR contact the tax controversy attorneys at Brager Tax Law Group, A P.C.

Income Tax Evasion Scheme Thwarted By IRS

July 10, 2008,

Michael Fuller, an accountant from Florida, and Carl Perry, a food broker from Greenville, South Carolina, were sentenced on May 5, 2008 in federal court for tax evasion. Fuller was found guilty by a jury in July of 2007 and Perry pleaded guilty in May 2007 for conspiracy to defraud the United States pursuant to 18 U.S.C. 371. United States Circuit Judge William Wilkins sentenced Fuller and Perry to twelve months and one day in prison and three years probation, respectively.

Fuller and Perry committed tax evasion during a period from the late 1990's till 2001. According to the Department of Justice, Perry used offshore accounts and other entities, which were set up by Fuller, to hide income from the Internal Revenue Service (“IRS”). A credit card was also set up with another offshore bank which was funded with Perry’s untaxed income. Fuller filed false income tax returns and other documents with the IRS to hide their tax evasion scheme.

If you have been accused of tax evasion contact the Southern California tax lawyers at Brager Tax Law Group, A P.C.

Southern California Tax Return Preparer Convicted of Tax Fraud

May 16, 2008,

A Southern California tax return preparer, Matthew Carl Berry, was convicted of one count of conspiracy to defraud the IRS pursuant to 18 U.S.C 371, and three counts of filing false federal income tax returns. According to the indictment among other things Berry prepared false documents to be used in IRS tax audits. According to the press release issued by the Department of Justice Tax Division’s criminal tax attorneys, Berry prepared fraudulent tax returns by claiming mortgage interest deductions for taxpayers who did not own homes. Berry faces up to 5 years imprisonment, and a fine of up to $250,000 for the conspiracy conviction, and another three years for the criminal tax convictions for filing false income tax returns. Berry could also be subject to civil tax preparer penalties pursuant to Internal Revenue Code § 6694.

If you have concerns about exposure to criminal tax fraud penalties or civil tax fraud penalties contact the tax dispute lawyers at Brager Tax Law Group, A P.C.

Tax Fraud Involves NFL Players

May 8, 2008,

Tax lawyers from the Department of Justice are seeking to enjoin two tax return preparers from representing anyone before the Internal Revenue Service (IRS) , acting as tax preparers or engaging in any other tax related conduct. The IRS complaint also seeks an injunction barring the tax preparers from engaging in conduct which is subject to the tax preparer penalties of Internal Revenue Code § 6694. The injunction was requested pursuant to Internal Revenue Code § 7407 and Internal Revenue Code § 7408.

According to the IRS complaint the tax return preparers committed tax fraud by filing fraudulent tax returns, and fraudulent amended tax returns claiming deductions for bogus mining development costs. Interestingly the IRS complaint alleges that 7 of the customers who had fraudulent tax returns prepared were NFL football players. The IRS complaint does not reveal the names of the players, and there is no indication in the complaint that the players knew that tax fraud had been committed.

If you are a tax preparer who has been accused by the IRS of tax fraud, tax evasion or violation of the tax return preparer penalty rules under Internal Revenue Code § 6694 contact the Southern California tax lawyers at Brager Tax Law Group, A P.C. Our tax lawyers represent clients throughout California, including Orange County, the Inland Empire, San Bernardino County, and Riverside County including the cities of Newport Beach, Laguna Beach, San Juan Capistrano, San Clemente, Mission Viejo, Laguna Niguel, Laguna Hills, Dana Point, Huntington Beach, Long Beach, Costa Mesa, Anaheim and Santa Ana.