Note: written for tax practitioners, but good "red flag" focus for taxpayers this tax season.
The purpose of this article is to alert Tax Practitioners about the “Red Flags” that may be present during the preparation of tax returns. Recognizing these “Red Flags” can enable the return preparer to avoid errors that can have serious legal and ethical consequences for both the practitioner and client.
* UNUSAL INCOME: lifestyle analysis; this is a common audit procedure if the taxpayer’s records don’t support the source of income and expenses.
* UNUSAL RISE IN NET WORTH: review sources of investments.
* PREVIOUS TAX RETURNS INCONSISTENT: seek explanation and documentation that will support and explain differences from prior returns.
* UNUSAL POSSESSION OF ASSETS: relatively low income with new cars and toys.
* FOREIGN BANK ACCOUNTS AND ASSETS: This is a #1 IRS exam priority. There are strict reporting requirements and sanctions. Permanent Residents (Green Card holders) have same tax responsibilities as U.S. Citizens.
* MONEY LAUNDERING: real estate purchases, cash transactions, offshore companies and false invoices and payments. There is a high level of prosecutions for both Money Laundering and Tax Evasion.
* BANK RECORDS: a quick analysis of bank records can reveal potential audit issues.
* WILLFUL BLINDNESS: this is not an acceptable defense.
* TAX RETURN PREPARATION: is not merely data entry. AICPA auditing standards require a review and documentation of taxpayer’s records to support return entries.
* DOCUMENT YOUR FILE: your client file should contain notes and backup especially if you find unusual transactions. This is the best accountant defense if the audit begins to get suspicious.
CONSEQUENCES of becoming involved in a client’s audit listed here in order of ascending severity.
* You are served with a Grand Jury Subpoena or an audit Information Document Request (IDR) to produce your client’s records.
* Federal or State agents interview you, which is very stressful and time consuming.
* It may be necessary to retain counsel to avoid legal consequences (interview, records production or court witness).
* You may be called to testify before the Grand Jury as a witness. This costs time and money for counsel, and potentially could result in accountant liability.
* Criminal tax charges as a co-conspirator as return preparer for your client/defendant.
Almost all costly consequences (time and money) to the accountant can be avoided by looking, asking questions and conducting a minimal examination of the client’s records.
Stephen P. Pingree, Attorney at Law, has over 30 years of experience defending tax and financial investigations in civil audits, criminal investigations and criminal indictments through trial. Steve over the years has given many seminars to CPAs, EAs, Tax Practitioners and attorneys on these subjects. Steve is always available, at no charge, to consult with tax practitioners. Please feel free to call Stephen P. Pingree, Attorney at Law, at 808-983-9520.