Reality Check: Tax Fraud

Last week we saw two major stories in the news about tax fraud. I’m talking about Paul Manafort and Michael Cohen. Both are guilty of not reporting income and foreign bank accounts. Don’t worry – I’m not about to get political. What struck me was how both are going to jail and that they didn’t realize how serious of a crime it was at the time.

Now these guys don’t seem like the type to use Turbo Tax or go to H&R Block. Most wealthy individuals hire a CPA firm prepare their taxes. Yet the CPA firms were not in court; these two men were.

If you sign up for tax software, you acknowledge your responsibility to read the return and be honest. If you hire a tax-preparer, it is in the contract that you take responsibility to read the return and be honest. Finally, when you sign the tax return or e-file form, you tell the IRS that the filing is accurate. Regardless of who prepares the return, it is always the taxpayer’s responsibility. Even if the tax-preparer lies on a return and disappears. If the individual taxpayer signed it, then it is their responsibility. That means the taxpayer could face fines and jail. You cannot get rid of the responsibility.

What about Audit Protection?

All major tax software and tax-preparers offer audit protection. Shouldn’t Manafort and Cohen’s CPAs have caught the errors? Nope. No company, preparer, or software will pay out if the taxpayer lied or omitted information. That is in the fine print. They may cover the upfront costs of the audit, but once the truth comes out they will send a big bill. Audit protection only covers the preparer’s mistakes.

As a CPA, in my opinion if we make a mistake then we should fix it and cover the fines and interest. That is standing by your work. We are human, and we make mistakes. When we do, we have a duty to correct and revisit our quality control.

These men could have lied to their tax preparers. It’s possible they did not tell their CPA’s about the payments or foreign bank accounts. That puts the blame on them. The IRS acknowledges that people may not tell us everything. Most often people don’t realize what we need to know, so we must ask a lot of questions. (If you’ve ever hired a tax-preparer, you’ve seen the long questionnaires.) Other times, people lie to us. They take a gamble to see if they can get away with it. It’s risky, and the more money you make the more likely you are to get caught.

To be fair, if Manafort and Cohen's CPAs knew about the payments and foreign accounts then they should be held responsible too. That won’t make the news and regardless, it won’t help Manafort or Cohen. It was their personal tax returns, so they are responsible.

What stood out to me about Cohen and Manafort was that they are now felons for lying on their tax returns. Most people want to pay less taxes. You have the right to "avoid" taxes, but don’t cross the line into tax evasion, i.e. a felony. Always be honest and ask questions if you’re unsure.

The last thing I want to see is a client get in trouble. Send me a message if you have any questions about your taxes or want to plan how to legally reduce what you owe.