By Daniel Njenga (CPA) in Dallas
(*Names mentioned are fictitious and are used solely for presentation purposes)
I have known Mathew* for a period of five years but it was not until I introduced myself to him as a CPA that he opened up about his business. He told me that on average he gross earnings range between 70K and 150 K all from a self employed business. Mathew was concerned by the many audits that the IRS was performing on his tax return starting with the 2005 return where he paid a fine of about $1000, 2006 a fine of $10,000 and on his 2007 returns which the IRS said were unfiled and had assessed him a tax amount of about $17,000.
In our discussions we talked about “Tax Avoidance” which is a legal way of avoiding taxes. I inquired about why his 2007 taxes are unfiled and his story is like the many that I have heard in the metropolis.
When Mathew started his business back in 2001, he reached out to Steve* and John*, fellow Kenyans with a tax office, to help him with his taxes.
All appeared well until 2004 when the FBI and the IRS raided the offices of Steve and John. John hastily left the country with a few possessions, leaving behind two brand new cars, a house and a thriving entertainment business.
Steve moved the location of the offices from Dallas to Arlington. When Mathew inquired about why the office was raided by the IRS, Steve explained that John had been involved in a tax fraud scheme and that Steve did not know about it until the FBI came knocking.
After filing his 2005 tax return, Mathew received an audit letter from the IRS, stating that he had claimed some deductions that he was not eligible to take. The IRS also asked him to refund some of the amounts that were sent to him.
Mathew could not remember claiming a these deductions or receiving a check from the IRS but reached out to Steve to inquire why the deductions were on his tax return and where the check from the IRS was. Steve was nowhere to be found and it was long after Mathew had paid the IRS fine that Steve was found. Steve, insisted that the deduction information was provided by Mathew and that he, Mathew received the amounts claimed by the IRS. Mathew at the time was busy with his business and assumed that he must have forgotten about cashing the IRS check.
The story repeated itself in 2006 only with a bigger claim from the IRS. When Mathew received the IRS audit letter, he went straight to Steve’s office. When Steve printed the 2006 tax return, Mathew could not recognize any of the numbers. His deductions were highly inflated and Steve had claimed a number of deductions that Mathew was not aware of.
Some of the obvious mistakes were that Steve had claimed children on Mathew’s return that he, Mathew did not even know existed. To make matters worse, the IRS refund did not get to Mathew. Steve claimed that the check must have been mailed to Mathew, but Mathew was sure he would remember a $14,000 check!!
Before Mathew could investigate, Steve went underground. He took with him, all documents relating to the 2006 and 2007 tax year. Until our meeting Mathew had not had any success in locating his documents.
Tax fraud perpetrated by Kenyans on their fellow Kenyans and on the IRS is on the increase. While some circumstances may be different, the end result is usually the same: the tax preparer goes to jail, is deported or goes missing, the tax payers are haunted by the IRS for fraudulent deductions and claims and they end up losing money and property.
I will discuss some simple rules that will prevent tax fraud from camping at your door step.
Rule #1: Your Taxes are your responsibility. You cannot pass that responsibility to another person. Many people assume that because they pay for tax preparation services that they somehow pass the responsibility to the paid preparer. Take all precautions to make sure your taxes are filed correctly. Points to consider- do not ignore correspondence from the IRS. It does not go away. Make sure you get professional help from a CPA, an enrolled agent or an attorney when dealing with the IRS.
Rule #2: Identity theft is real. The media is full of cases of tax fraud. And that’s just the tip of the ice berg. Protect your tax information in the same manner that you protect your credit cards and checks. If you do not give your credit card numbers, social security card and your bank account information to strangers, then think twice before you give out your tax information to a stranger. It is your duties to safe guard your hard earned property including your identity.
Rule #3: Qualifications do matter. If the person preparing your taxes is under a tax authority for example a state board, the IRS or any authoritative body, it is more likely than not that your taxes will be prepared right. In my opinion an authoritative body works to make sure that
a) The tax preparer is knowledgeable in the corresponding field,
b) That the prepare operates under certain guidelines and does not break the law
c) That you, the client, have an avenue of redress
This is important to you. Ask your tax preparer about their qualifications and about where you can file a grievance. Also the tax code changes a whole lot during the year. If your tax preparer does not keep up with these changes, then your tax filing could be erroneous.
Point to consider- Do not let the qualifications stop you from seeking help; sometimes tax clients equate higher qualifications with a higher tax filling cost. In fact in most cases CPAs charge less than most off the beat tax preparers and they are better knowledgeable of the tax rules.
Rule # 4: Always double check your tax forms. Make sure that the tax preparer gives you a copy of the tax return. Keep this copy and once the tax return is filed, contact the IRS and get a free transcript of your return. Compare the transcript with the filed return. Always make sure that you retain all documents that support a filed tax return. These documents can be used to respond to the IRS in case of an audit. Point to note;–The statute of limitation for most tax offences are between 3-6 years.
Rule # 5: Use technologies to your advantage. Just because you are stuck in rural Blunts North Dakota does not mean you cannot access a CPA in Dallas, Texas. With a computer and a few clicks your tax filing will be performed by a professional and you do not have to settle for less even in Boring, MD.
Rule #6: Do not play with the numbers. Some people use math to commit fraud. They figure that is the IRS has over 139 million individual returns to sift through, on average they are unlikely to be audited. Well, if you are stepping on hot coals and your head is in the freezer, then on average you should be just fine! When your number is picked up, please be ready to support your tax return numbers.
Rule #7: Report all tax fraud. It is your duty and a responsibility to report all Tax fraud to the IRS and/or to the local police.
In addition to the above “rules” please remember “a stitch in time saves nine”
I hope the above “rules” will help you avoid very costly mistakes. Please reach out to us with any comments and questions. If we cannot help you, we know someone that can.
Please visit us at www.njengacpa.com and /or email the author at info@njengacpa.com for more information
The author is the President and Principal Accountant of Daniel Njenga CPA LLC. He is a Certified Public Accountant (CPA) – Texas State Board and a Certified Internal Auditor (CIA) – Institute of Internal Audit and a graduate of both the University of Virginia McIntire Business School and the University of Texas Arlington College of Business.
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