Why You Should Not Lie to Your Accountant and Other “Badges of Fraud”
One of the major techniques the taxing authorities (all of them, including federal, state and local, civil and prosecutors) use to gather evidence of of “willfulness” (which is a “Badges of Fraud”) is to use a Summons for records and testimony of the taxpayer’s return preparer. A Summons is used to compel a third party to provide records and testimony relating to those records in the course of a tax investigation. It is the governments basic form of “discovery”. When a Summons is served on a taxpayers return preparer the return preparer is now a witness for the government.
Unless a return preparer has been engaged by a lawyer to provided assistance in anticipated or actual litigation, (such as to make the work performed subject to the “Work-Product” of the attorney) the files and all communications between the taxpayer and return preparer are discoverable. Example: Most accountant request their to complete an “organizer”. An “organizer” is used to collect the data in a manner that enables the accountant to efficiently prepare returns. The intentional omission of an answer or more likely the intentional misstatement of an answer to an organizer question can be used by the government to establish that the taxpayer intended to file a false return.
The correspondence and notes of conversations between the return preparer and the taxpayer can be particularly revealing. Example: If the taxpayer provides information about a foreign bank account to the return preparer it is up t the return preparer to inquire further about the foreign financial account and determine if disclosure of the account is necessary under the Bank Secrecy Act (by filing an FBAR) and/or under the Internal Revenue Code (by filing an Information return such as Form8938, to disclose Specified Foreign Financial Assets, or Form 3520 to report a foreign trust, gift or inheritance, or; Form 5471 Return of a Controlled Foreign Corporation, etc.) The failure of the return to preparer to inquire further may constitute “Reasonable Cause” for defense of penalties in the defense of penalties. To the contrary, however, false or misleading information provided to the return preparer can be used to establish the “intent” element of “willfull” failure to file or the knowledge element of tax fraud (the “violation of a know legal duty”)
In almost all audits involving foreign financial accounts, and other “fraud” investigations, the most important third party witness is the return preparer. Remember, your tax returns are signed under penalties of perjury. Whether the taxpayer has intentionally failed to report income or assets will in many cases depend on the testimony of the return preparer.
The big dilemma for some taxpayers is should they come forward to amend prior returns that were inaccurate or wait and try to let the Statute of Limitations run. This question should be answered by a lawyer not the return preparer. Any statements made by the taxpayer about errors and omissions on the returns will be the subject of a potential Summons and/or Summons Enforcement proceedings. The fact that a taxpayer may have lied to a return preparer may not be fatal to the outcome of audit if there are other factors to explain that the return is otherwise accurate. But, the advice on whether and how to disclose the “errors” on the return should be provided by an experience lawyer where the “Attorney-Client” Privilege covers communications which could otherwise be considered “admissions against penal interest” if reflected in the notes of the return preparer.
The time to deal with inaccurate or incomplete returns is as soon as possible. The method to be used should be based upon advice of counsel in order to avoid making your return preparer the governments best witness against you.
