thwarting IRS

[dyne]

Many years ago I encountered a taxpayer who was putting savings into a joint account with
a friend and also into an account in his granddaughters name. I finally realized that one
reason he was doing this was to attempt to thwart an IRS audit such as a net worth
computation, source and application of funds or any such attempt by IRS to calculate
his income based upon his expenditures and money saved. IRS would have a difficult time
with this because they would be required to extend the audit to include the friend and
the granddaughter to uncover unreported income. Even then how would they determine
what portion of the unreported income came from the taxpayer and not that of the
friend? I will not tolerate such but how are we preparers to even know about this so
as to guard against it?

[erchess]

What do you know?

If you know or reasonably should know that a client is breaking the tax laws relevant to a return you are being asked to prepare then you should not prepare it because you risk troubles of your own with the taxing agencies. However we are not auditors and it cannot reasonably be made terribly hard for a client who wants to break the rules to keep us from knowing what is going on. Let me give just one example.

There is a plant in my area that works around the clock, employing mostly illegal immigrants. A great many of the workers work consecutive shifts under different names and TINs or even SSNs. In their income range I expect most of them file two sets of tax returns each year but the principle is the same. They are cheating and for the most part getting away with it. Some may indeed use unscrupulous preparers who know what is going on but they could easily get by with going on different occasions and different times of day to the same office with a large number of preparers or they could go to any two different preparers and no one would be the wiser especially if one of the returns and the matching W2s use a POB or a fake address. OP raises a way in which a higher income taxpayer can cheat. It seems obvious to me that there's no way a preparer can be expected to catch either scheme if the client is reasonably careful.

[Burke]

Different scenario: suppose you have already done a tax return (this year's or past years) and you subsequently learn of this sort of information from an outside source that may indicate the return was incorrect. How do you handle that?

[taxmandan]

Different scenario: suppose you have already done a tax return (this year's or past years) and you subsequently learn of this sort of information from an outside source that may indicate the return was incorrect. How do you handle that?

Since your engagement letter specifically says that it's the clients responsibility to report all income, you prepared it with what you knew. If you consider the outside source as legit, you either fire the client or next year make sure you question him/her specifically about that matter that came to light from this other source. As for this years return, advise the client that IF the return was incorrect he/she needs to amend to correct errors. I would do that without revealing the source of information. Their response would determine if I fire them or give them another chance.