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6 ways your tax preparer knows you're lying

Got an urge to cut corners on your tax returns? Your accountant probably isn't going to play ball.

By Money Staff Mar 27, 2014 2:03PM

This post comes from Mark P. Cussen at partner site Investopedia.

Investopedia on MSN MoneyJesus of Nazareth told His followers during the height of the Roman Empire to render unto Caesar the taxes that were levied upon them.

Income tax numbers at the accountantTwo thousand years later, many people still struggle with this obligation. Rising taxes, a slow economy and the new costs of Obamacare have tempted some taxpayers to try to cut corners with Uncle Sam. As a professional tax preparer for a major national service, one of my jobs is to recognize when a filer may be giving me fraudulent information.

Although it’s not possible to catch all the bogus information, there is a list of common dodges that dishonest filers attempt to pull to reduce or avoid their tax bill.

1. False deductions

One of the most obvious ways that I see some filers attempt to deceive the IRS is when they try to claim additional deductions. When they see their tax bill or refund amount after we have finished the initial interview, they will have me put their return on hold because they suddenly remembered some "additional expenses" that they forgot to include before. Then they return with a list of these items (without any receipts or supporting documentation) and ask me to enter them into the return.

I’ll politely inform customers that adding these types of unsubstantiated expenses will increase the chances of being selected for an audit. If the client isn’t taking the hint, I have to refuse to file the claim. Knowingly filing a false tax return on someone else’s behalf will cause the IRS to discipline both the customer and me.

2. Claiming dependents who don’t qualify

A sure-fire way to lower any tax bill is to claim a dependent or two, since it can give the filer “Head of Household” status, which gives a larger standard deduction, and adds dependency exemptions and tax credits for dependents under age 17.

Obviously, this can be a major point of contention for divorced couples, especially those who share custody of one or more children. For many in this situation, it becomes a race each year to see who can file first and "win" by claiming the kids. Of course, when one spouse claims one or more dependents unjustly, the other spouse can notify the IRS of the violation and have the undeserved refund disallowed. However, this process can take months and can be a headache for the ex-spouse that should have claimed the children.

The IRS has tightened up the rules for filers who claim kids for the Earned Income Credit by requiring them to provide additional documentation each year starting in 2014 that shows that each dependent claimed met the proper support and residency tests. Another dodge is to claim parents who do not live with the taxpayer by showing false statements of financial support.

3. Divorce-related fraud

Claiming dependents unjustly isn't the only way that divorcees can fudge their numbers. Although child support is nondeductible for payers, some filers will still try to claim this expense by stating that it is spousal support or alimony in hopes that the IRS won’t notice the discrepancy and will allow the deduction. If they cannot produce a divorce decree that shows that the payment is alimony, then they won’t be deducting it on any return that I prepare.

4. Income fraud

Filers who fail to report income can not only lower their tax bill but also collect unemployment benefits. Those who report abnormally low income for the year will trigger a red flag, especially if they are claiming dependents. In some cases, they are receiving child support or state and/or federal assistance that is nontaxable, but many of these filers also worked jobs for which they were paid in cash. This type of income is especially tempting to omit because of the additional payroll tax.

5. Personal vs. business expenses

Breaking down business versus personal use for things such as vehicles and office equipment can be a very gray area for some customers. Customers who increase these amounts or percentages towards business use several times tend to arouse my suspicion unless they can cite specific additional instances of use. More creative cheaters might create a dummy business entity to which false expenses are attributed, and I will disallow all such reporting if I sense that the business is not real.

6. Overseas investors

Some clients think that investment or other income that they earn in other countries can be left off their tax return. This is not the case if they are U.S. citizens. I will closely question and thoroughly document the information a customer gives me about what they did during their time away if they resided in another country for any material period but have no income from there.

If the IRS catches you

Of course, the rules clearly state that if I knowingly enter fraudulent information on a tax return that I prepare for a client and submit it, then both the client and I will be subject to disciplinary action or even criminal penalties (if the IRS discovers it). The client will also be subject to interest and penalties on the amount of tax that should have been paid.

I inform the customer that adding substantial deductions to the return may increase the chance that they will be selected for audit. If an audit happens, then the IRS will disallow any deduction or other incentive for which there is no proof, even if it was a legitimate expenditure that was actually paid. The IRS may then decide to audit other years of the client’s returns to see if they cheated on those, too. And if you plan on filing fraudulent returns, you should know that the IRS now pays a reward of 15 percent of any amount of tax that is collected to the whistleblower that reports you -- which I may do if I see that you are determined to file a fraudulent return with someone else (because I won’t file it myself).

The bottom line

Taxpayers who try to cheat on their taxes are asking for trouble. If caught, the consequences they face usually far outweigh what they’re attempting to gain. For more information on how to correctly file your tax return or the consequences that you could face for cheating, visit the IRS website or consult your financial advisor.

Mark P. Cussen, CFP, CMFC, AFC, has 20 years of experience in the financial industry, which includes working with investments, insurance, mortgages, taxes and financial planning. He has several years of experience as a financial author and has written numerous educational articles for various financial websites. He has also worked in retail, discount and bank brokerage systems and is currently working as a financial planner for the U.S. military. Mark has a Bachelor of Science in English from the University of Kansas and completed his CFP coursework at the Bloch School of Business at the University of Missouri-Kansas City in August of 2001.

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Mar 27, 2014 4:39PM

While I agree with the author that you should not cheat since the penalties are too great, I felt like this piece was too high-and-mighty, and he was trying to scare you, sometimes with B-S.

A case in point: Near the end, he makes it seem like any cheater can get the whistle blown on him, and that is just not true. He was trying to scare you.

From the IRS website: "The law provides for two types of awards. If the taxes, penalties, interest and other amounts in dispute exceed $2 million, and a few other qualifications are met, the IRS will pay 15 percent to 30 percent of the amount collected. If the case deals with an individual, his or her annual gross income must be more than $200,000."

In other words, the IRS only wants the big fish, so if know that your average-Joe neighbor is cheating, you are out of luck is you want to become a whistleblower.

Mar 27, 2014 3:41PM
Remind me not to use this guy for my taxes. It is the preparers job to make sure the client understands what is, and what is not deductible, and what he will need in the event of an audit. The preparer is not held responsible if he prepared the return and reasonably felt the info was correct.  It is not the preparers job to demand proof and look for fraud, nor should he. It is the job of the preparer to let the client know there is no such thing as accountant/client privilege. So don't tell your preparer you are cheating, etc. If subpoenaed he must tell the truth. However, client confidentiality requires he keep his mouth shut unless subpoenaed.
Mar 28, 2014 1:20PM

Taxes on wages (in any form – flat or progressive) are the greatest evil of our American Republic. When government is free to steal from you, there are no limits to waste and abuse in government. If a person chooses to work extra hours or two jobs in order to better provide for themselves or their family, they should not be penalized, but that is what happens. The more you make by working harder and longer, the more money is stolen from you, and given to those who spend their lives living off the hard work of others.

The revenue the government needs to provide legitimate constitutional services should be obtained primarily from a national sales tax instead of a tax on wages. All would pay based on consumption, the more you spend the more you pay. The more luxury you surround yourself with, the more you pay. Your choice. A national sales tax system would capture money spent by criminals and by illegal aliens who currently pay near zero in taxes. There would of course need to be exemptions: Cars (already have a federal excise tax) Primary Residence/Rental Properties (vacation homes would be subject to tax/rental profit would be taxed) Fresh Food (Preprocessed foods and prepared meals would be taxed – only fresh/fresh frozen/canned goods would be exempt) Insurance Premiums, Health Care & Certified Education.

Adding another layer of tax to a business would not be fair. Businesses would need to be compensated by keeping a portion of the tax to cover the expense of collection and reporting. A percentage of .20 to .05 would be fair.    
Mar 27, 2014 5:05PM

what a preachy article, full of high and mighty comments.  i m sure that this wont help his business, knowing he will rat you out

Mar 31, 2014 2:27PM
It is really hypocritical the way the Federal Government would go after a tax cheat; but looks the other way when we discuss illegal immigration.  This "dual standard" is what fuels people's disregard for ours laws.  They figure if the Fed's can refuse to enforce a law; then they can refuse to follow one.  Now if the Fed's would only apply the same draconian measures to all crimes as they do to tax code violations; we all would live in a safer society.  But alas, it always comes down to the same thing-- when money is involved different rules are followed.
Mar 31, 2014 9:00PM
Well I certainly don't want you for my tax preparer!!
Mar 28, 2014 11:30AM
Mar 27, 2014 3:54PM

I agree with 85942, you are paying this guy for a service, and then he will refuse to file because you forgot something.

Mar 28, 2014 1:19PM
If your a liberal, it's as soon as you open your mouth.
Mar 31, 2014 5:25PM
Do your own taxes!  The minute you read through the ways to cheat ([un] earned income, etc) you will have a much greater appreciation for how you are being ripped off!  Do your taxes and then, if you are unsure, take them to an accountant.  Doing your own taxes is a sure fire way to make you a supporter of Taxed Enough Already - when you see how many deadbeats you are supporting..
Mar 31, 2014 9:02PM
any amount over 10% total amounts to extortion fees...Why do we have to pay from 42% on up to 50%? Our forefather revolted over 4%!
Mar 27, 2014 3:44PM
My late CPA father was wise to some clients who were not candid about their expenses.  He was highly respected in my inland s. California city and became a CPA after WWII without college.  He was a bookkeeper and auditor from 1929 to 1946--full time.  Very busy during tax time to Apr. 15th. 
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