I came across a ghost preparer last week.
I rarely see that.
A ghost preparer is someone who prepares a tax return
for compensation (me, for example) but who does not sign the return.
This is a big no-no in tax practice. The IRS requires
all paid tax preparers to obtain an identification number (PTIN, pronounced
“pea tin”) and disclose the same on returns. The IRS can track, for example, how
many returns I signed last year via my PTIN. There are also mandates that come
with the CPA license.
Why does the ghost do this?
You know why.
It started with a phone call.
Client: What do you know
about the employee retention credit?
Me: Quite a bit. Why do
you ask?”
Client: I had someone
prepare refunds, and I want to know if they look right.”
You may have heard commercials for the ERC on the radio
These credits are “for up to $26,000 per employee” but you “must act now.”
Well, yes, it can be up to $26,000 per employee. And
yes, one should act soon, because the ERC involves amending tax returns. Generally,
one has only three years to amend a return before the tax period closes. This
is the statute of limitations, and it is both friend and foe. The IRS cannot
chase you after three years, but likewise you cannot amend after the same three
years.
The ERC was in place for most of 2020 and for 9 months
of 2021. If you are thinking COVID stimulus, you are right. The ERC encouraged
employers to retain employees by shifting some of the payroll cost onto the
federal government.
Me: I thought you did not
qualify for the ERC because you could not meet the revenue reduction.”
Client: They thought otherwise.”
Me: Send
it to me.”
He did.
I saw refunds of approximately $240,000 for 2020. I
also remember our accountant telling me that the client could not meet the
revenue reduction test for 2020. Revenues went down, yes, but not enough to
qualify for the credit.
COMMENT: There are two ways to qualify for the ERC: revenue reduction or the mandate. The revenue reduction is more objective, and it requires a decrease in revenue from 2019 (50% decrease for the 2020 ERC; 20% decrease for the 2021 ERC). The second way – a government COVID mandate hobbling the business – does not require revenue reduction but can be more difficult to prove. A restaurant experiencing COVID mandates could prove mandate relatively easily. By contrast, a business experiencing supply-chain issues probably experienced COVID mandates indirectly. The business would likely need its suppliers’ cooperation to show how government mandates closed their (i.e., the suppliers’) doors.
I had our accountant locate the 2020 accounting
records. We reviewed the revenue reduction.
The client did not make it.
I called.
Me: Did they say that you
qualified under the mandate test?"
Client:
They said I qualified under revenue reduction."
Me: But
you don’t. How could they not tell?"
Client:
Because they never looked at it."
Me: Then
how ….?"
Client: They asked if I
had a revenue decline and I said yes. They took my answer and ran with it."
Why would someone do this?
Because that someone works on commission.
There is incentive to maximize the refund, whether
right or not.
I was looking at a refund of almost a quarter million
dollars.
That would have been a nice commission.
No, the client is not filing those amended returns. He
realized the con. He also realized that he had no argument upon IRS audit. He
would have to return the money, plus whatever penalties they would layer on. I
could no more save him than I could travel to Mars.
He now also understands why they never signed those
returns.
Ghosts.
