From the Tax Law Offices of David W. Klasing - When does the IRS Deem a Tax Preparer to be Engaged in Fraud and what Risks does this Create for their Clients?

IRVINE, Calif., Jan. 28, 2025 /PRNewswire/ -- Reputable Tax preparers play a critical role in helping individuals and businesses navigate the complex web of federal and California tax regulations, which include income, payroll, sales, and excise, among other tax filing obligations. However, an alarmingly large percentage of tax preparers do not adhere to ethical standards and fail to operate within the boundaries of IRS regulations. These wayward preparers, blinded by greed, frequently take self-serving and clandestine actions that can expose taxpayers to long-term liability for fraudulent tax filings. These unscrupulous professionals commonly claim personal expenses as business deductions, intentionally omit taxable income, fraudulently inflate credits, or even fabricate receipts and forge bank statements to conceal fraud when clients inevitably come under a federal or California tax audits.

Believe it or not, Preparers that are willing to blatantly break tax laws on behalf of their clients quite often will have a line around the block of client's acquired mostly via word of mouth at tax time.

Because taxpayers sign their tax returns under the penalties of perjury, attesting to their accuracy, they face significant civil and criminal tax penalties if their preparer's fraudulent actions result in evaded taxes especially where they were well aware of and participated in the intentional noncompliance. At best, taxpayers are liable for the unpaid tax, civil tax penalties of up to 75% of the additional tax assessed in an audit, and interest. At worst, they could face exponentially worse IRS-CID criminal tax investigation and prosecution, particularly if found to have knowingly & willfully participated in the fraud. Problems created by rogue tax preparers can take years to resolve and cause immense financial and emotional stress. If a tax preparer offers a tax savings strategy that seems too good to be true, blatantly understates income, over states expense or claims credits you are not entitled to, taxpayers should at best walk away and not file the returns at issue to at worst, exercise extreme caution and seek a second opinion before event contemplating blindly proceeding. Safeguarding your financial and legal well-being begins with vigilance in selecting a trustworthy and qualified tax professional.

Characteristics of a Fraudulent Tax Professional

Fraudulent tax professionals often employ unethical or illegal tactics that can lead to severe consequences for their clients. The following behaviors are red flags that a tax preparer may be acting fraudulently:

Manipulating Tax Return Information

Fraudulent tax preparers may alter tax returns to maximize refunds or minimize liabilities improperly. This includes:

• Using Incorrect Filing Status: Deliberately filing under an incorrect status to inflate a refund;
• Falsely Claiming Deductions or Credits: Fabricating expenses, dependents, or exemptions to reduce tax liability;
• Creating or Omitting Income: Manipulating income figures to achieve a specific tax outcome;

Misdirecting Refunds

Some unethical tax preparers may redirect a client's refund to their own account before transferring it to the client. This practice violates IRS regulations and can lead to financial losses and legal complications for the taxpayer.

Refusal to Provide Copies or Sign Returns

Legitimate tax professionals must provide clients with copies of their tax returns and sign them with their Preparer Tax Identification Number (PTIN). Refusal to do so, or the use of another person's PTIN, is a clear indication of misconduct.

Overcharging or Holding Records Hostage

Fraudulent preparers may charge excessive fees or withhold a client's records until payment is made. In some cases, they may even use free or off-the-shelf tax software, which is intended for individual taxpayers, to prepare tax returns while charging professional rates.

False Representation of Credentials

Some fraudulent preparers falsely claim to be licensed attorneys, certified public accountants (CPAs), or enrolled agents. This misrepresentation is a serious violation and can mislead clients into trusting unqualified individuals. See examples of tax preparer fraud on our blog here.

Risks to Taxpayers from Fraudulent Tax Professionals

When working with a fraudulent tax preparer, taxpayers face significant risks, including:

Civil and Criminal Tax Penalties

Even if a taxpayer is unaware of a preparer's misconduct, they are ultimately responsible for the accuracy of their tax returns. This includes paying any additional taxes, interest, and penalties assessed during an audit. In extreme cases, the taxpayer may face life-altering criminal tax charges if the IRS determines they conspired with the preparer.

Audits and Investigations

Improper filings often trigger IRS audits. Fraud indicators, such as substantial discrepancies in income or inflated deductions, can lead to more in-depth investigations and potential referrals to the clandestine IRS Criminal Investigation Division (CID).

Financial and Emotional Stress

The repercussions of fraudulent tax filings can be devastating and long-lasting, often taking years to resolve. Taxpayers may face significant civil and criminal tax penalties, including substantial fines, restitution of evaded taxes, and, in severe cases, prosecution and incarceration. Beyond the financial consequences, the emotional toll of navigating IRS criminal tax investigations and enduring the stress of court proceedings can be overwhelming and life-altering.

Steps to Protect Yourself from Fraudulent Tax Preparers

To minimize the risk of falling victim to fraudulent tax professionals, taxpayers should take the following precautions:

Verify Credentials and PTIN

Always ensure your tax preparer has a valid PTIN, which the IRS requires for all paid preparers. Additionally, verify their qualifications as a CPA, attorney, or enrolled agent.

Demand Transparency

A trustworthy tax preparer will provide clear explanations of their calculations and tax strategies. They will also answer your questions openly and supply a copy of your tax return for your records.

Be Wary of Unrealistic Promises

Beware of preparers who guarantee large refunds without thoroughly reviewing your financial information. Such promises are often based on fraudulent practices that can backfire during an audit or criminal tax investigation.

Report Suspicious Activity

If you suspect a preparer is engaging in fraudulent behavior, report them to the IRS using Form 14157 and, if applicable, Form 14157-A. This helps maintain the integrity of the tax preparation industry and protects other taxpayers.

A Tax Attorney Ensures Confidentiality During Tax Audits and Criminal Tax Proceedings Involving Fraudulent Tax Professionals

Working with a dual-licensed tax attorney and CPA offers significant legal advantages, particularly in cases involving high-risk tax audits or criminal tax enforcement actions arising from fraudulent tax professionals. While both tax attorneys and accountants can provide certain privileges to their clients, the attorney-client privilege offers far tremendously greater protection than the accountant-client privilege which does not apply at all in criminal tax scenarios.

The attorney-client privilege is a robust legal safeguard recognized in all 50 states and by federal courts. This privilege ensures that communications between you and your attorney remain confidential and are protected from disclosure during future legal proceedings. By contrast, the accountant-client privilege is far more limited. Although a narrow federal privilege exists, most states do not extend similar protections to communications with accountants.

Furthermore, the "federally authorized tax practitioner" (FTAP) privilege, which may apply to accountants and other non-attorney tax professionals, is not as comprehensive. Notably, it does not cover criminal tax proceedings, including allegations of tax evasion. Additionally, rulings from the Eighth and Ninth Circuit Courts have established that communications related to tax return preparation are generally not privileged.

If you are at risk of facing further tax proceedings—whether it be a tax audit or a criminal tax enforcement action—choosing a dual-licensed tax attorney and CPA offers distinct advantages. By working with us at the Tax Law Offices of David W. Klasing, you can safeguard your communications under the attorney-client privilege, ensuring that disclosures made in confidence cannot be used against you in legal proceedings.

For residents of California, which falls within the jurisdiction of the Ninth Circuit, this protection is particularly critical. If you suspect that a fraudulent tax professional has exposed you to legal risks, it is imperative to act promptly. Contact the Tax Law Offices of David W. Klasing today to mitigate your risks and secure your legal and financial future.

Avoiding Criminal Tax Investigation and Prosecution Where You Have a History of Committing Tax Fraud and are not Currently Under Audit or Criminal Tax Investigation.

If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.

Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply. 

It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!

Contact The Tax Law Offices of David W. Klasing If You Suspect Fraud from Your Tax Professional

Tax preparers and taxpayers accused of tax crimes face significant consequences, including potential imprisonment, hefty prosecution costs, fines of up to $250,000, and substantial restitution. For convicted preparers, restitution can mean repaying the full tax liability defrauded from the government. The skilled and experienced team at the Tax Law Offices of David W. Klasing is committed to working tirelessly to reduce the penalties and repercussions you may face for any alleged tax violations or misconduct.

Fraudulent tax professionals not only undermine the trust taxpayers place in them but also expose their clients to severe financial and legal repercussions. The fallout from unethical practices can escalate rapidly, placing unsuspecting taxpayers at risk of civil penalties, significant economic losses, and even criminal charges. At the Tax Law Offices of David W. Klasing, we understand the gravity of these situations and provide unparalleled expertise to address issues caused by fraudulent preparers and other tax-related controversies.

Our Role in Protecting You

When faced with tax issues stemming from fraudulent tax preparers or suspected impropriety, we take a two-pronged approach:

• Preventing Escalation to Criminal Charges: If your matter is still in the realm of a civil tax controversy, our primary objective is to ensure it does not cross over into a criminal tax investigation /prosecution. Criminal tax cases carry severe consequences, including incarceration, restitution, and irreparable damage to your personal and professional life.
• Mitigating Financial Damage: For clients already facing civil or criminal allegations, we work tirelessly to reduce financial repercussions, including fines, penalties, and interest. Our focus is on lowering liability while safeguarding your net worth and personal freedoms.

Why Experience Matters

Tax law is notoriously complex, and navigating the intersection of civil and criminal tax issues requires a unique combination of training, skills and expertise. Few attorneys possess the depth of knowledge necessary to handle these matters effectively. The Tax Law Offices of David W. Klasing stands apart for its specialized focus and dual-licensed attorneys who bring both legal and CPA expertise to the table.

With a stellar "A+" rating from the Better Business Bureau and a flawless 10.0 from AVVO, Mr. Klasing's dedication to premier Civil and Criminal Tax Defense Representation is unwavering. Our firm isn't just another legal service provider. Instead, it is a beacon of tax defense proficiency, boasting an impressive history of successes, steered by one of the country's most exceptionally trained tax professionals. In a nation where over a million attorneys and more than half a million CPAs operate, only around 24,000 professionals hold both licenses. And even amongst them, merely about 3,000 have the added distinction of having earned a Master's in Taxation. David W. Klasing belongs to this elite subset, employing his unmatched education and experience to fiercely advocate for our clients in their civil and criminal tax defense challenges.

Our long track record speaks for itself. To date, we have never had an audit client criminally prosecuted for tax crimes, even in high-risk scenarios like eggshell and reverse eggshell audits.

Strategic and Compassionate Representation

At the Tax Law Offices of David W. Klasing, we believe that effective representation goes beyond legal strategy—it's about understanding and addressing the unique circumstances and goals of each client. Whether your case involves issues stemming from fraudulent tax preparers, civil fraud allegations, or criminal tax investigations, we develop customized approaches designed to achieve the best possible outcomes. We handle all aspects of your case under one roof, providing continuity and consistency that enhances the efficacy of our representation. Your well-being, financial future, and personal freedoms are at the core of everything we do.

If you are facing IRS scrutiny or suspect your tax preparer has acted improperly, set up a reduced rate initial consultation by calling us today at (888) 310-3543 or schedule online here. Protect your financial future by relying on professionals who prioritize your compliance and peace of mind.

See our Audit Representation Q and A Library

See our Criminal Tax Law Q and A Library

Public Contact: Dave Klasing Esq. M.S.-Tax CPA, dave@taxesqcpa.net

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