Archive for the ‘Tax Preparation’ Category

Bozo Tax Tip #10: Email Your Social Security Number

Sunday, March 23rd, 2014

It’s time for our annual rundown of Bozo Tax Tips, strategies that you really, really, really shouldn’t try. But somewhere, somehow, someone will try these. Don’t say I didn’t warn you!

We’re starting a week early because I want to highlight something that I think contributes to the huge issue of identity theft. We use a web portal for secure loading and unloading of documents and secure communications to our clients. As I tell my clients, email is fast but it’s not secure. It’s fine to email your tax professional things that are not confidential. That said, social security numbers and most income information is quite confidential. Don’t send those through email unless you want to be an identity theft victim or want others to know how much money you make!

If I send an email to my partner in Maryland, it might go in a straight line to him. It also might go via Anaheim, Azusa, and Cucamonga. At any one of these stops it could be intercepted and looked at by someone else. Would you post your social security number on a billboard in your community? If you wouldn’t, and I assume none of you would, why would you ever email anything with your social security number?

A friend told me, “Well, I’m not emailing my social, I’m just attaching my W-2 to the email.” An attachment is just as likely to be read as an email. Just say no to emailing your social security number.

If you’re not Internet savvy, hand the documents to your tax professional or use the postal service, FedEx, or UPS to deliver the documents, or fax the documents. (If you fax, make sure your tax professional has a secure fax machine.) If you like using the Internet to submit your tax documents, make sure your tax professional offers you a secure means to do so. It might be called a web portal, a file transfer service, or perhaps something else. The name isn’t as important as the concept.

Unfortunately, the IRS’s ability to handle identity theft is, according to the National Taxpayer Advocate, poor. So don’t add to the problem–communicate in a secure fashion to your tax professional.

Regulating Tax Preparers Always Prevents Tax Preparer Fraud (Not True, of Course)

Sunday, March 9th, 2014

I’m generally a supporter of the National Association of Enrolled Agents and its policies. However, I disagree with the idea that both the NAEA and the IRS have that regulating tax preparers will magically make preparer fraud go away. It’s just not true.

Yet another case in point comes out of the San Joaquin Valley in California. From the DOJ press release:

The United States filed a civil complaint asking a federal court in Fresno, Calif., to enjoin Ken Mendoza and Alice Mendoza from preparing federal tax returns for others, the Justice Department announced today. The complaint alleges that the Mendozas frequently prepare tax returns for individuals claiming refunds from the federal government that are not deserved. According to the complaint, since 2010, the Mendozas have prepared over 600 tax returns for individuals in the Fresno area.

According to the complaint, the Mendozas improperly understate their customers’ federal tax liabilities by fabricating business expenses, claiming false or inflated credits, particularly educational credits, and deducting customers’ personal expenses that are not legally deductible. In total, the complaint alleges that the loss to the U.S. Treasury from the Mendozas’ activities could be as much as $2.8 million for tax years 2010 through 2011.

California requires all tax professionals who are not EAs, CPAs, or attorneys to register with CTEC. If the IRS is right that regulating tax professionals stops tax preparer fraud, Mr. Mendoza wouldn’t be registered. The IRS’s view is just another fairy tale.

Mr. Mendoza is registered with CTEC (I checked). That means he went to some continuing education and regurgitated some basic information on taxes. Taking continuing education courses does not turn a good person into a bad person (or vice versa).

I’m hoping that cases such as these–and mind you, I do want the Bozo side of my profession to be gone–will put a stop to the idea that regulating tax professionals will magically make all tax professionals angels. Let me be blunt: Wherever there is money around, there will be bad people around. There will always be people going after the dishonest buck and nothing anyone says or does will ever change that.

I do want to point out the other point of this post for taxpayers who read this: You are responsible for your tax return. Read it. Ask questions if you don’t understand something. The Tax Code is complex, and there are things that seem obvious that aren’t on a tax return. If you have a good tax professional, he or she will want to answer your questions.

Don’t Try This at Home

Sunday, November 24th, 2013

Thomas Thorndike was a tax preparer in Waterbury, Connecticut. I use “was” because earlier this year he was sentenced to six years at ClubFed for cheating on his own taxes and for helping clients obtain refunds using false deductions. Here’s an excerpt from the DOJ press release:

If clients were audited by the IRS, THORNDIKE would provide them with blank Goodwill receipts as well as instructions as to how they should create a list of charitable donations that would correspond with the donation value THORNDIKE had entered on their returns. He also would direct his clients to create mileage logs that would support deductions he had entered for employment-related travel.

There’s plenty more in the press release to show that Thorndike was able to obtain over $1 million in refunds that clients weren’t entitled to. The Hartford Courant noted in its news story that Thorndike earned $12,000 a day by preparing a tax return every 15 minutes. But that’s not what this post is about; rather, it’s about ancillary damage that occurred.

Robert Liquindoli was one of Mr. Thorndike’s clients. I’ll let the DOJ press release take it from here:

In connection with [the investigation of Mr. Thorndike], the IRS requested to interview LIQUINDOLI, whose 2007 and 2008 tax returns had been prepared by Thorndike. After being contacted by the IRS, LIQUINDOLI sought to obstruct the IRS’s investigation by obtaining false documents that he intended to present to the IRS in support of deductions he claimed on his tax returns in 2007 and 2008. Between December 2011 and February 2012, LIQUINDOLI engaged in an effort to obtain false documents in support of false items on these tax returns, and lied to the IRS concerning the extent to which he possessed original and legitimate documents to support the deductions on his tax returns. LIQUINDOLI also falsely denied that he had attempted to obtain false documents to support those deductions.

A few years ago I represented a client of a Bozo tax preparer. My client (probably like Mr. Liquindoli) had phony deductions on his tax return. I explained to my client that you actually do have to spend the money in order to get deductions–my client had no idea of the law involved. My client didn’t lie to the IRS, didn’t obstruct the IRS, but did have to pay the IRS. Because my client cooperated and it was quite clear he did not know at the time his return was filed that he had done anything wrong, the penalties were waived.

Mr. Liquindoli was in a slightly different position. The one thing I haven’t mentioned (until now) is that Mr. Liquindoli is a former police detective. Presumably, he’s aware that it’s illegal to do what he did. Oops….

While Mr. Liquindoli faces up to three years at ClubFed, he’s likely to receive a much lesser term.

Pass the Popcorn, Please

Wednesday, November 20th, 2013

When I last wrote about Instant Tax Service it appeared that the end of that firm was upon us. After all, a judge ordered ITS to close shop because of a myriad of sins. ITS is appealing and is now also attempting to sell the business. (That does bring up the obvious question: Who would want to purchase a business that is, to say the least, facing a death penalty? But I digress….)

Kelly Erb has more on ITS’s current shenanigans.

One Down, One to Go: DOJ Gets an Injunction, Asks for Another

Sunday, October 20th, 2013

One of the more humorous (to me) aspects of the Loving case was hearing the IRS argue that it has no means of disciplining rogue tax preparers. That’s just not true. If I deliberately prepare a bad return, I can be sanctioned and penalized. If I prepare a series of bad returns, the Department of Justice can attempt to have me barred from preparing federal tax returns. As noted at the end of one of the two press releases I’m linking to in this article, “In the past decade, the Justice Department’s Tax Division has obtained more than 500 injunctions to stop tax fraud promoters and tax return preparers.”

Anyway, Tobias Elsass had two businesses that prepared tax returns: Fraud Recovery Group Inc. and Sensible Tax Services Inc. As the DOJ noted, “The Court found that Elsass and Fraud Recovery Group have continually and repeatedly promoted a nationwide scheme falsely informing their customers that they were entitled to claim large theft loss tax deductions, and then preparing the tax returns that improperly claimed such deductions.” If you have a casualty loss you are absolutely allowed to claim a deduction for it (subject to income restrictions)…but you must actually suffer a loss. It appears that Mr. Elsass skipped that minor detail in preparing clients’ returns. I’ll let the DOJ take it from there:

The opinion notes that hundreds of theft loss deductions claimed on tax returns prepared by Elsass and his companies were improper, because the financial losses they sought to deduct were merely the result of company mismanagement instead of criminal conduct – as Elsass knew. Elsass and his companies were also aware that the Internal Revenue Service (IRS) was disallowing such claims, but filed similar claims for other investor customers in any event, in the hope that the later filings would escape IRS scrutiny…

The court also determined that Elsass had intentionally engaged in “incompetent or disreputable” behavior not becoming a tax professional. Based on the record before it, the court found that Elsass seemed “perfectly willing to lie and deceive, even to the extent of possibly committing perjury, in order to advance his own interests.” Accordingly, the “sheer magnitude and variety of the Defendants’ transgressions” made permanent injunctive relief appropriate.

Meanwhile, the DOJ asked that another preparer in Mississippi be barred from preparing tax returns. Danee Aikens’ Comprotax Service is accused of falsely increasing household help income so that the Earned Income Credit could be taken and that phony education credits were included on clients’ returns. The DOJ believes the loss to the government could exceed $7 million from this case.

I’m all for the IRS and DOJ going after the dirty underbelly of my profession. They have tools to do so…as they themselves pointed out at the end of both of these press releases.

What If Your Tax Professional Vanishes?

Tuesday, August 20th, 2013

Yesterday, a new client called me. It seems that his tax professional (we’ll call her Jane Doe) vanished. She’s not answering phone calls (nor returning messages–and her voice mail is now full), nor returning mail, nor returning faxes. My client thought an extension was filed (with a payment), but his records are with Ms. Doe, and my client really doesn’t want to have to pay for a tax return twice. What are his options?

First, I hope that nothing has happened to Jane Doe. That said, it appears that her ability to prepare tax returns has vanished with her vanishing. Clearly if she’s not around she’s not going to be preparing any returns.

My new client asked me several good questions:

1. Is my extension valid? It is (and an extension was filed–see below); the extension is for you, the taxpayer, and is valid no matter who prepares your return.

2. Can I verify that the extension was filed? Yes, you can. You can either call the IRS (800-829-1040), request a “Tax Account Transcript,” or you can authorize a tax professional to obtain it on your behalf. (My new client signed a Tax Information Authorization and I ordered transcripts from the IRS. The extension was filed.)

3. I don’t want to pay to have the return done twice. Can I get the files back from Ms. Doe? If a client requests his files to be returned, a tax professional is required to return them. There’s an obvious issue if a tax professional dies; Ms. Doe won’t be here to return the files. In theory, the Executor of Ms. Doe’s estate should return those files…but that’s not likely to happen prior to the extended tax deadline.

My new client probably has a claim against Ms. Doe (or her estate). She was paid to complete the tax returns; if she doesn’t, there’s a clear issue. If she has died, you could file a claim against her estate. If she just vanished, you have to find her in order to get your money back.

There’s no way, though, of avoiding paying for the tax work a second time. I make my living preparing returns for money–I need to be paid for my work.

4. How do we prepare the return when Ms. Doe has all of my 1099s? Luckily, we can order a Wage & Income Transcript from the IRS. This should show all of the government paperwork you received (1099s, 1098s, W-2s, W-2Gs, K-1s, and 5498s). This will help with some of the issues.

However, my new client is self-employed. He’ll need to redo some work (providing his deductible business expenses and income from his business). If you use QuickBooks (or another accounting system), the new tax professional will need to see various reports. That’s easily done and shouldn’t be a problem.

You may have to recreate other records. If this needs to be done, start now. If you need to request bank or credit card statements, do it now; it can take a few weeks for them to appear. You are subject to the October 15th deadline, so start on this today!


There are some takeaways for everyone:

1. Make sure you get a copy of your tax returns from your tax professional (and keep these!). While you can order a Tax Return Transcript from the IRS, it’s a lot easier to have the actual returns. (A Tax Return Transcript is free from the IRS. You can also order a copy of your actual return, but this takes far longer and you must pay for it.)

2. Make sure you receive your files are returned. We scan everything into an electronic filing system, and return all files (I have far too much paper in my office and don’t want more).

3. If your tax professional is a solo practitioner (or a small office), ask the question, “What would happen if something happened to you?” It is a valid question and is one of the main reasons I brought in a partner a couple of years ago.

4. Make sure your tax professional communicates with you. My new client mentioned that Ms. Doe had been, in his words, “flaky.” If you have qualms about a tax professional, why are you continuing to use her? Tax professionals have access to your personal, confidential information. You absolutely, positively should be very comfortable with your tax professional. If not, consider someone else.

Once Again, Registration of a Tax Preparer Doesn’t Stop Him from Bad Behavior

Sunday, August 11th, 2013

With tonight’s season premier of Breaking Bad, it feels apropos to note a tax “professional” who is accused of bad behavior. The US Department of Justice filed suit against Michael Turner of San Diego.

Mr. Turner is alleged to have,

…failed to sign or affix a Preparer Tax Identification Number (PTIN) to many of the returns that he has prepared. In addition and according to the government, Turner takes bogus deductions on his customers’ returns in order to claim larger refunds for his customers. His customers then recommend Turner as a tax preparer to their friends, which helps Turner to expand his customer base and further increase his own profits. Specifically, the government alleges that Turner claims inflated or fabricated deductions on the Schedule A of his customers’ Form 1040 tax returns, claiming that his customers have large non-cash charitable contributions and unreimbursed employee expenses. The complaint also alleges that when Turner’s customers are audited, Turner has provided false documents to those customers in an attempt to assist them in substantiating charitable contributions and employee expenses that they did not incur. According to the complaint, however, Turner has instructed his customers not to identify him as their tax return preparer in communications with the Internal Revenue Service (IRS).

That’s a multitude of bad behavior if proven. Of course, Mr. Turner doesn’t have a license, right? Well, no. California requires all paid tax preparers to have a license. Preparers who are unenrolled (not EAs, CPAs, or attorneys) must obtain a license from the California Tax Education Council (CTEC). And Mr. Turner has a license from CTEC.

This shows two points: First, that having a license cannot stop bad behavior. And second, the government has methods today of stopping tax preparers who are breaking bad. As the DOJ noted in their press release, “In the past decade the Justice Department Tax Division has obtained injunctions against hundreds of tax preparers.” I suspect this point just might make it into the arguments in the Loving appeal.

Bozo Tax Tip #3: Use a Bozo Accountant!

Tuesday, April 9th, 2013

Here’s another Bozo Tax Tip that keeps coming around. The problem is, the Bozos don’t change their stripes. In any case, here are some signs your accountant might be a Bozo:

- He’s never met a deduction that doesn’t fit everyone. There’s no reason why a renter can’t take a mortgage interest deduction, right? And everyone’s entitled to $20,000 of employee business expenses…even if their salary is just $40,000 a year. Ask the proprietors of Western Tax Service about that.

- He believes that the income tax is voluntary. After all, we live in a democracy, so we don’t have to pay taxes, right?

- Besides preparing tax returns, he sells courses on why the Income Tax is Unconstitutional or how by filing the magical $2,295 papers he sells you will be able to avoid the income tax.

- He wants you to sign over that tax refund to him. After all, he’ll make sure you get your share of it after he takes out his 50% of the refund.

- He believes every return needs at least three dependents, no matter whether you have any children or not.

If your tax professional exhibits any of these behaviors, it’s time to get a new tax professional.

Bozo Tax Tip #10: Report Income That You Didn’t Earn

Sunday, March 31st, 2013

It’s time for our annual rundown of Bozo Tax Tips, strategies that you really, really, really shouldn’t try. But somewhere, somehow, someone will try these. Don’t say I didn’t warn you!

The story you are about to read is true. Only the names have been changed to protect the stupid. This is not an April Fools joke.

This past week I spoke with a new client, call him Tom. Tom had been using a tax preparer named Jim. Last year (2012), wasn’t a good year; Tom’s business lost money. Yet Jim told Tom that he should report positive income so that, “[Tom] can collect social security in the future.”

Tom signed the tax return with the wrong income. Unlike a story that Joe Kristan reported last week, this has nothing to do with the Earned Income Credit; Tom didn’t qualify for that. (I don’t mean to diminish the issues with the Earned Income Credit: They’re very real. Credits like that do lead to fraud.) Tom paid a couple of thousand dollars in tax that he shouldn’t have. We’ll be amending Tom’s returns so in the end all will be well with him.

A tax return is supposed to report your income–accurately. If you make $50,000, that’s what should be on the return. If you lose $5,000, that’s what should be on the return. As an IRS auditor told me years ago, “One of the goals of an audit is for the taxpayer’s return to be reported accurately: no more, no less.”

There is plenty of Bozo behavior in this story. First, Jim (the tax preparer) should go back to basics. Yes, Jim is a licensed tax professional so he supposedly has taken continuing education courses. He might want to stay awake for them this time.

Second, you need to always review your tax return. The income and deductions reported on your tax return should match what you actually earned and spent. If you have questions about anything on your return, ask. Your tax professional should be happy to answer any questions you have.

Finally, if a tax professional tells you to add extra income to your return either add income so that you can qualify for social security or the Earned Income Credit, run, not walk, the other way.

What $4.95 Buys These Days

Tuesday, January 15th, 2013

Living in Las Vegas gives me, at times, a very jaded perspective on life. I see individuals who otherwise pinch pennies spend $100 on bottle service at a club (or $4.95 for a thimble-sized amount of alcohol). You can still find $4.95 meal specials in the late night/early morning hours at many casinos in town. The latter, if you’re hungry, is a far better use of $4.95 than the former.

Another use of $4.95 is to purchase Robert Flach’s My Best Tax Advice. The 27 pages of tax advice within the ebook (a pdf document) are full of good, common-sense advice. While I don’t agree with everything Robert has written, any individual who follows Robert’s advice will be far, far better off than those who don’t. I especially like his comments about notices from the IRS; as Robert states, “Do not ignore an IRS or state tax notice. The problem will not just go away.” I used basically the same line in my book.

In any case, for less than five dollars you can get some common-sense advice that if followed would help most taxpayers. You can order the book through Robert’s website.

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