TAX PREPARER MISCONDUCT/FRAUD

Submitted by PAUL HAGGERTY on Fri, 2013-05-10 19:03

FACTS:

T/P had her 2011 tax filings done by a CFP/tax preparer.

T/P is single and 50 years of age.

Prior to the completion of the T/P’s 2011 returns, the CFP advised the T/P to take a complete distribution of one of her IRA’S ($137,769).This was done on the premise that the CFP would roll over and invest these funds at a higher rate of return. The funds were in fact transferred from the T/P’s IRA to a company set-up by the CFP for his own personal use.

The T/P received a 2011 1099-R from the trustee (State Farm Ins.Co) for her IRA distribution with a code 1 in block 7 and showing a taxable amount in block 2a of $137,769.

The CFP then changed the T/P’s 2011 1099-R by not showing any amount as being taxable and also changed the code in block 7 from a 1 to a G (Direct Rollover).

As of 4.8.2013,the former CFP/tax preparer pleaded guilty in federal court that resulted in almost 100 clients losing more than $4.4 million over a decade.

I completed the T/P’s 1040 for 2011 including the complete distribution as taxable income and this increased her tax bill to ~$47,700 not including accrued interet on the underpayment and also a possible underpayment penalty. As for the State of Ohio, her tax bill would increase by~$6,000.

At this time, the T/P has not received a CP Notice from IRS for the 2011 fraudulently filed return.

I realize it is the T/P’s responsibility for the return. However, this case has definite Tax Preparer misconduct and fraud.

I looked over Rev. Procedure 2009-9 and 2009-20. My take on these proceures is that they apply to personal investments and not qualified plan retirement investments.

Help Are there any suggestions as to how this T/P could get relief from this tax liability??

Thank you



Submitted by mk foss on Fri, 2013-05-10 23:32

The IRS has allowed individuals to rollover amounts to an IRA to avoid the tax in cases of fraud. It is an expensive propostion because there is a fee to the IRS to consider it and also professional fees involved in writing up the facts in the manner prescribed by IRS and following up to make sure that IRS has all that it needs for a positive result. If the ruling is suceesful then an amount can be rolled into an IRA and escape tax but if she no longer has any funds – that’s another difficulty. I think Ed Slott may do some of this work and some of the experts who write in his newsletter do as well.  



Submitted by PAUL HAGGERTY on Sat, 2013-05-11 00:01

The t/p in this case has lost $137,769 in this scam roll-over. When the IRS matches info she is going to receive one whopping tax amount due. Any way of avoiding the tax on this fraudulent transaction carried out by the tax preparer by giving misleading information to the client that her distribution would not be taxable to her?



Submitted by Alan - IRA critic on Sat, 2013-05-11 16:53

  • As indicated in the prior post, requesting a private letter ruling could result in the IRS agreeing to a rollover of the funds that would eliminate the tax bill. However, any such ruling request may also involve the amount of funds the taxpayer still has to complete the original rollover as well as treatment of the loss while the funds were in the taxable account. The IRS will likely not allow both the full rollover and a casualty loss on what essentially are the same dollars, so the issues of the request are complex. They should seek out a highly experienced tax remediation specialist with extensive experience in private letter ruling requests. Note that amendment of the 2011 return is also tied into this.
  • IRS matching of the current situation will probably result in a notice and tax bill because there will be no 5498 form to match up with the 1099R that was altered.
  • It might be wise to check into how other victims are handling this and if the IRS has addressed some of these issues already and set some precedents.


Submitted by Bruce Steiner on Sun, 2013-05-12 12:46

 Revenue Ruling (not Revenue Procedure) 2009-9 and Revenue Procedure 2009-20 deal with losses from Ponzi schemes.  Was this a Ponzi scheme?There are two issues.  One is whether the taxpayer is entitled to a theft loss.  The other is whether the IRS will waive the 60-day deadline for a rollover.  The IRS has discretion to waive the 60-day deadline for a rollover.  We’ve obtained such waivers in about a half dozen cases.  Each case turns on its own facts.  Taxpayers have often obtained waivers where the failure to complete the rollover was due to medical or health reasons (including mental health issues), or someone else leading the taxpayer astray.  Taxpayers have been unsuccessful where they initially intended to use the money for some other purpose, such as a real estate deal that fell through, and then when the deal fell through wanted to put the money back into the IRA as a fallback.The issue here may be whether the taxpayer intended to make this investment within his/her IRA, or whether he/she withdrew the money from the IRA to make this investment within his/her taxable account.  There was nothing in the facts presented that would suggest that the taxpayer in fact intended to make this investment within his/her IRA.  Did the taxpayer subscribe for it in the name of an IRA, or in his/her name individually?  Did the taxpayer in fact roll the money into an IRA, and make the investment within the IRA?While the IRS usually charges $10,000 to apply for a private letter ruling, the fee is only $3,000 to apply for a ruling waiving the 60-day deadline for a rollover (or less if the amount involved is less than $100,000).  There would also be some legal fees.I agree with Mary Kay and Alan that you or your client should consult with counsel who can provide specific advice, and apply for a ruling if appropriate.Bruce Steiner, attorney, NYC, also admitted in NJ and FL



Submitted by PAUL HAGGERTY on Mon, 2013-05-13 19:03

In this case, the tax preparer had the T/P in his office and the T/P called State Farm (the Trustee of her IRA). The tax preparer promted the T/P in her conversations with the trustee as What to say to the Trustee. The tax preparer then made a copy of the T/P’s tax document and prepared the return under false circumstances. The T/P was deceived by the tax preparer in this transaction. She was under the impression per his advice that her IRA was being rolled-over to another qualified IRA that was offering higher returns. She has no tax or investment knowledge what so ever. She is working with the FBI in this matter and will be preparing a document stating the facts and circumstances of the fraud. The tax preparer suggested to the T/P to do this in 2009 and 2010-she finally bit in 2011.The T/P is 50 years of age and was laid-off from her $30.00 an hour job and is now working for $8.50 per hour. She does not have the financial resources to pay the combined federal and state tax nor contributing another sum to execute another IRA.



Submitted by Alan - IRA critic on Mon, 2013-05-13 19:33

Perhaps if there is enough compensitory damages awarded to the taxpayer for the fraudulent activity, it could be included in the letter ruling request to allow those payments to be rolled over as a restorative payment to the IRA. It sounds like she does not have enough funds to complete the rollover otherwise, even if the IRA authorized an extension of the 60 day rollover deadline. Again, this will all require expert tax counsel to tie all these issues to together as well as what to do in the meantime with respect to the 2011 tax bill.



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