Question

Question: Suppose the preparer discovers that he or she made an error in preparing a client's tax return, and the client refuses to correct the error or inform the IRS. The preparer quits the engagement, but is worried about criminal or civil penalties from the IRS if he or she does not come forward. The professional standards seem to indicate that the prepare may not disclose the information to the IRS. Is this true? What options are available to the preparer? There is no right or wrong answer. Any thoughtful answer that is professionally presented and shows some basic level of research into the question will get B credit.

Answer 1

TAX FRAUD AND TAX EVASION ARE DEFINED AS INTENTIONAL ATTEMPTS TO MISREPRESENT YOUR TAX SITUATION RESULTING IN A FINANCIAL BENEFIT TO YOU. IT INCLUDES HIDING INCOME AND NOT REPORTING IT ON YOUR TAX RETURN OR OVER STATING YOUR DEDUCTIONS. THERE ARE TWO TYPES OF PENALTIES. THEY ARE CIVIL AND CRIMINAL.

CIVIL TAX FRAUD PENALTY

IT APPLIES TO ANY UNDERPAYMENT OF TAX DUE TO FRAUD. IT MEANS TAX PAYER INTENDED TO EVADE TAXES KNOWN TO BE OWING BY CONDUCT INTENDED TO CONCEAL, MISLEAD OR PREVENT THE COLLECTION OF TAX. THE INTEND ELEMENT EXCLUDES NEGLIGENCE, CARELESSNESS, MISUNDERSTANDING OR UNINTENTIONAL UNDERSTATEMENT OF INCOME. THE AMOUNT OF PENALTY IS EQUAL TO A STAGGERING 75% OF THE UNDERPAYMENT FOR THE PENALTY TO APPLY.

CRIMINAL TAX FRAUD PENALTY

CRIMINAL STATUES ARE MOST POWERFUL ENFORCEMENT TOOL AVAILABLE TO THE IRS. WHEN THE IRS INITIATES A CRIMINAL CASE, THE AGENCY LIKELY HAS VERY STRONG EVIDENCE. A CRIMINAL OFFENSE CAN CARRY A PERSON TO PRISON TERM OF UP TO 5 YEARS AS WELL AS SUBSTANTIAL FINES AND CHARGES TO COVER THE COST OF PROSECUTION.

HERE THE ASSESSING OFFICER DISCOVERS THE ERROR IN THE CLIENT'S TAX RETURN. BUT THE CLIENT REFUSES TO CORRECT THE ERROR. IT IS A CRIMINAL TAX FRAUD PENALTY. IF THE ASSESSING OFFICER DOES NOT DISCLOSE IT TO IRS, HE ALSO WILL BE PUNISHED. SO IT IS BETTER TO INFORM IT TO THE IRS. THUS THE ASSESSING OFFICER CAN BECOME SAFE.