A Ghost Preparer Story

 

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.

Yet Another Preparer Penalty Starting In 2018

We have spoken before of social-worker duties the tax Code expects of a professional preparing a return with an earned income credit, a refundable child credit or the American Opportunity (that is, the college) credit.

Take the earned income credit, for example. If you have two children, that credit can be $5,616; have three and the credit can reach $6,318. Remember that the credit is refundable – meaning the IRS will write you a check – and no wonder this provision is rife with fraud.  

If the IRS wanted to push-back on the fraud, it could require a preparer to review documentation that a child (or several) actually lives with the parent/taxpayer.

To be certain to get the preparer’s attention, the IRS could also impose a penalty if the preparer failed to do so.

Let’s have the IRS tighten this up a notch by also requiring a form or schedule with the return requiring the preparer to declare that he/she did all of this Sherlocking.

Which is why I will not prepare a return with these credits unless I have known (or, alternatively, my partner has known) the client for a while.

This rule is expanding in 2018 to include head of household filing status.

Oh boy.

Let’s go through a Tax Court case I was reviewing recently.

(1)  Joe and Cerice lived together and had a child in 2006.

(2)  The relationship went south either late 2014 or early 2015.

(3)  Cerise moved in with her mother.

(4)  Joe and Cerise started sharing custody, although Joe’s parents also took care of the child while he was working.

(5)  There was a custody proceeding in 2015, and the Court order gave each parent equal time. For some reason, the Court came back in 2016 and reduced Joe’s share of parental time.

(6)  The Court stated that Cerise could claim the child in 2015 and all odd-numbered years. Joe could claim the child in even-numbered years.

QUESTION: Who claims the child in 2014?

The technical detail here is that head-of-household status requires the child to spend more than one-half of the year with the claiming parent.

Let’s say that I have never met Joe or Cerise. I meet with either one, who asks me to prepare the 2014 return. Whoever I meet with wants to claim the child, of course, as it will power head of household status, an earned income credit and a child credit. I suspect either Joe or Cerise could present a formidable argument that the child was with him/her for more than one-half of the year.

What am I supposed to do?

I would of course look at the custody agreement, but that doesn’t start until the following year. No help there.

I could get assurance from the other parent that he/she is not claiming the child.

Let’s say that fails.

I could get a letter from the pediatrician, I suppose.

Or the school, if the child were old enough.

Or maybe the landlord where either Joe or Cerise lives.

Here I am social-working this situation. If I don’t, the IRS can penalize me $510. For each instance. Miss both the head of household and refundable child care credit and the penalty is $1,020.

Which might be more than I am charging to prepare the return.

How keen would you be to accept Joe or Cerise as a client?

That is my point.