Professional tax preparers are not only held to a higher standard when they prepare their return, they are also held to a higher standard in terms of tax preparer investigations. This is due in large part to the way many law enforcement agencies — including the Criminal Investigation Division at the IRS — conisder a person who makes false statements on multiple returns a higher-priority target as opposed to someone who makes false statements on a line or two of one form. If the subsequent tax preparer investigation indicates that willfulness may have been involved, the investigation really kicks into high gear.
Typically, the IRS first becomes interested when a reasonably large batch of returns from the same geographic area all have misstatements. If these errant returns have a common denimoninator, such as the same tax preparation firm, you don’t have to be Sherlock Holmes to anticipate the government’s next move.
Initial Investigatory Steps
Tax preparer investigations have a wrinkle that individual tax return investigations don’t have, viz, the government must prove that the preparer knew the information on the return was false. The burden of proof is rather high in these proceedings, so there must be considerable evidence on this point.
It is much easier for the government to clear this hurdle if all the suspect returns claim the same amount of money for a particular deduction. That happens a lot more than you would think. Information that’s too good to be true also attracts the “hard, cold, steely gaze of the tax auditor.” Normally for example, people who have earned a good living for the last several years do not suddenly become eligible for the Earned Income Tax Credit. Likewise, the stork typically does not deliver older dependents (non-infants) to taxpayers’ doorsteps when there previously were none.
When the CID tax preparer investigation begins in earnest, the T-men normally do not descend directly on the preparer. Instead, they usually start by interviewing the preparer’s clients. This is a time-honored law enforcement technique that often works: Start with the little fish, threaten them or promise them immunity, then work your way up the ladder. As a result, many tax preparers first learn about an investigation from their clients.
Investigators also focus on the tax preparer’s process during this phase. They’ll want to know how the preparer conducts client interviews, as a way of uncoveing possible due diligence violations. Additionally, if the preparer gets paid by collecting a portion of any refund, that’s another nail in the coffin. Roughly the same thing applies if the preparer charges a low per-client fee and depends on a high volume to make money, because according to some, that setup creates pressure for the preparer to deliver big refunds and thus keep clients flowing through the door.
Other non-accountant tax preofessionals — such as appraisers — may find themselves targeted as well, and in much the same way as tax preparer investigations unfold.
An extreme approach is usually the best defense to a tax preparer investigation.
Sometimes, especially if the government’s evidence is rather weak, it’s best to be very confrontational and challenge the CID suits at every turn. In this way, the tax preparer investigation will become a drain on limited IRS resources, and there are always fatter fish to fry elewhere. Other times, it’s best to be very conciliatory and work with the investigators.
The nature of the approach often depends on the type of penalties that are on the table, and we’ll discuss that item in a future post.