A Warning to the Tax Preparer – Part III

So, what should you, a tax preparer, do right now to protect yourself from an IRS investigation later? First, retain electronic copies of your records, second, train your employees concerning an IRS raid, and third, consider making changes to how you review a tax return with a taxpayer. It is important to take note that nothing is 100% full proof, but these strategies should help lower your risk of being the target of a grand jury or indictment, and ultimately give you the means to defend yourself should you face a criminal trial.

Concerning the documents that support the information freely furnished by a taxpayer, wise tax preparers should already be asking all taxpayers for all of their receipts, documents, and evidence supporting any estimated or totaled numbers that they provide to you. These documents, and any spreadsheets and written information provided by taxpayers, are exactly the documentation that will protect you most against any allegations of violating 26 U.S.C. § 7206(2)—aiding, assisting, procuring, or counseling the preparation of a fraudulent or false tax return.

Furthermore, it can be very useful to save these documents in an electronic form, preferably backed up on a cloud-based service. Too many times has the IRS or Department of Justice conveniently ‘misplaced’ documents that were taken during a raid from a tax preparer’s office. Unfortunately, most tax preparers do not retain these documents more than a few years, and never bother to make backed-up, electronic records, leaving a tax preparer defending themselves against the IRS with little more than their pleading statements that the tax preparer did indeed perform adequate due diligence before filing the returns. Indeed, the IRS commonly will prosecute a tax preparer for returns that were filed no less than five years ago, outside of the period that most preparers will retain documents received from a taxpayer.

In addition to purposefully retaining exculpatory evidence, it is important to properly train your employees, as many tax preparers are damned by the statements of their employees at the initial IRS raid. Typically, the IRS will try to conceal any investigation into a tax preparer until the initial IRS raid of the tax preparer’s office. At this raid, the IRS will isolate and interview all employees one at a time. Too often, employees will make statements against the owner of the business—you, the tax preparer—that will be highlighted repeatedly at trial. Moreover, these statements are very damning in the eyes of a jury. To protect yourself from these accusations, often elicited by fear, it is crucial to include training for all employees regarding how to act and react to any IRS raid, IRS questioning, or IRS summons. Specifically, it is important to emphasize to the employees that they have nothing to fear in these situations; by doing so you will be removing an overused and highly effective tool of the IRS to build evidence against the target of their investigation.

Last, consider making changes to the manner in which you review tax returns with taxpayers before having them sign the authorization documents. Here, it would be useful to memorialize in any way possible the conscious review and understanding of the taxpayer of all information reviewed with them. Again, a very common component of an IRS case against a tax preparer is witness testimony from taxpayer clients that they did not actually review the information that was in their return, but simply trusted their tax preparer and signed the forms. To rebut this, consider recording conversations, having the taxpayer transcribe important information, or filling out proprietary forms to make it indisputable that the taxpayer signed their tax return with intent and with knowledge of all of the information therein. As noted earlier, IRS Form 8879 is not sufficient to exonerate a tax preparer from liability. Even a proprietary form created to supplement the IRS Form 8879 is not necessarily sufficient to exonerate the tax preparer either. From personal experience, I have seen a jury effectively persuaded by the testimony of a taxpayer that he/she did not review the information contained in those forms before signing to effectively rebut what most tax preparers consider strong evidence of their innocence—the signed forms themselves.

The best time to defend against an IRS investigation or prosecution is before either begins. Moreover, it will be significantly more costly and difficult to try to find this information after the fact and under the pressure of the IRS. To protect your freedom, and your checkbook, take preemptive precautions rather than react to IRS agents bursting through your door.

–By Tony Nasser, Esq., Elevated Law

Tony Nasser is an attorney and founder of Elevated Law, licensed to practice law in Colorado and California.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm’s clients or any affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.