If you are at all interested in taxes and have the slightest interest in literature, you need to get the Pale King. I have to admit that I am not all the way through it, but it is amazing. It integrates really arcane tax matters into a novel about events at an IRS service center in the 1980′s. What’s amusing is that passages that are suppose to show how impenetrable such material is strike me as pretty mundane. The novel is set in the early 80′s so he didn’t have the substantial economic effect regulations or the passive activity loss rules to work with. David Wallace is sadly no longer with us, but I feel certain that he would have considered PMTA 2011-013 for inclusion in the sequel. PMTA stands for “Program Manager Technical Assistance” and you have to be a real tax nerd to regularly read them. Here is the problem they are addressing:
1. Is a return a nullity if a return preparer increased the charitable contribution amount on a taxpayer’s return to inflate a refund, and the taxpayer was unaware of the increased charitable contribution and did not benefit from that part of the refund?
2. If a return is a nullity but the taxpayer received a refund anticipation loanfor the correct amount of his refund (minus normal preparation fees), does the taxpayer receive another refund when his true return is filed?
3. Is a return a nullity if a taxpayer willingly allowed the preparer to add fraudulent expenses to his Schedule C to gain a larger refund, but the preparer also increased the charitable contribution amount on the Schedule A, and the taxpayer was unaware of the inflated charitable contribution amount and doesn’t benefit from that part of the refund associated with the inflated charitable contribution?
I particularly like Issue 3. I mean whatever happened to honor among thieves? Somebody is preparing a phony return for you and they phony it up extra without telling you about it.
Here is behavior that created the problem:
Horse (this name has been changed for confidentiality purposes) is a certified public accountant preparing individual income tax returns. Horse prepared approximately 700 returns for tax year 2002, of which, approximately 450 were filed electronically with the Service. Horse prepared tax returns with the information provided by the client and printed a copy of that return to give to the client. Horse established a refund anticipation loan (RAL) account at a financial institution for that client that allowed him to issue a bank check prior to the refund being received from the IRS. Prior to transmitting the return to the Service, Horse increased the charitable contribution amount on the Schedule A without his clients knowledge in order to increase the refund received from the Service. Horse provided his client with the copy of the return printed earlier, which did not contain the inflated charitable contributions, and a bank check for the amount of the refund on that tax return less his $50 preparation fee.
Once the Service received the electronic return, the refund was wired to the financial institution. The financial institution then paid off the client’s RAL account, deducted the RAL and bank fees, and as instructed by Horse, placed the remainder of the refund into Horse’s preparer account as preparer fees. Once these fees reached Horse’s preparer account at the financial institution, the fees were automatically wired to Horse’s.
I hate to emphasize that Horse is a CPA. I mean he is already required to take continuting professional education in ethics. I guess requiring that of all preprares isn’t going to help that much. Anyway here is the resolution of the mess:
Issue 1
The return is a nullity because the electronic file submitted to the Service is a document unknown and unverified by the taxpayer.
Issue 2:
The taxpayer should not be entitled to a refund from the Service when he has received through the preparer the amount to which he was in fact entitled. This is because there is no overpayment. No refund can be made unless it has first been determined that the taxpayer has made an overpayment in tax for the year.
Issue 3:
Even though the taxpayer was aware of and consented to the fraudulent inflation of the Schedule C expenses, the taxpayer was not aware of the addition of the charitable contribution. Using the same rationale in issue 1, the taxpayer has signed and verified documents that was not sent to the Service. What was sent to the Service is a document unknown and unverified by the taxpayer.
Fixing all this is a project.
Even though the taxpayer was aware of and consented to the fraudulent inflation of the Schedule C expenses, the taxpayer was not aware of the addition of the charitable contribution. Using the same rationale in issue 1, the taxpayer has signed and verified documents that was not sent to the Service. What was sent to the Service is a document unknown and unverified by the taxpayer.
Fixing all this is a project.
The taxpayer’s Master File account should be corrected by having the taxpayer whose return has been fraudulently altered by the return preparer file an accurate Form 1040 or 1040 series return from which Criminal Investigation or the SBSE Division can adjust the Master File account to reflect the correct information. The taxpayer should not file a Form 1040X because the electronic return and Form 8453 filed by the preparer are nullities and no return has been filed by the taxpayer.
An attorney that helps resolve these type of nightmares told me that CID has immense powers in the Service’s computers. They need it for situations like this.
They also noted that since there was no return there could be no penalties for filing an inaccurate return. Sometimes I love the dispassionate nature of the IRS. I wonder if when they were talking about the “not a return”, they called it something other than a “nullity”.