Preparer Fraud and Opossums
In this edition of the Flying Point Update, we're going to talk about tax preparer fraud, what it means to sign a return, and Virginia (not Maine) opossums.
Top of Mind
Most tax issues I encounter are honest mistakes. Someone misread a form, forgot a 1099, or made a judgment call that didn't hold up under scrutiny. Occasionally I see aggressive positions where reasonable people might disagree about where the line is. Outright fraud is rare. When I run into it, it tends to stay with me for a while.
I've been dealing with a situation recently that I can't get out of my head. A client came to me with an IRS audit letter. Their prior return had been prepared by someone else, a preparer who charged fees based on a percentage of the refund (which is a major compliance red flag). The return contained tax credits that were simply fabricated. Not aggressive. Not arguably defensible. Flat out made up.
The preparer won’t even provide a full copy of the prepared return (also a major compliance issue). The client is left holding bag for the return that they signed in good faith. The client was a victim of preparer fraud.
This is the part that keeps me thinking: professional relationships carry an inherent information asymmetry. You hire a tax preparer precisely because you don't know all the intricacies of the tax code. That's completely reasonable. The preparer knows more than you do, and that's the whole point. But that asymmetry also creates vulnerability, because you're trusting someone to act in your interest with information you can't fully evaluate yourself. The vast majority of professionals do act in your best interest. Some don't.
The trust issue is real, and it runs in both directions. A good client-preparer relationship is built on open communication and honest questions. You shouldn't feel embarrassed to ask what something means or why a number looks the way it does. That's not a sign that you don't trust your preparer. It's how the relationship is supposed to work.
Worth Knowing
The percentage-of-refund pricing in the situation I described isn't just a bad practice. It's a violation of Circular 230, the set of Treasury Department regulations that govern the conduct of tax professionals, including CPAs, enrolled agents, and attorneys who practice before the IRS. Among other things, Circular 230 prohibits fee arrangements based on the size of a refund, precisely because that structure creates a financial incentive that isn't aligned with the client's interest. A preparer who profits more when your refund is larger has a built-in reason to push the numbers in a direction that may not be defensible. That's not a theoretical concern. It's the exact dynamic that produces fabricated credits.
You're not expected to catch fabricated credits or identify every technical error. But, being an engaged client is not the same thing as knowing everything your preparer knows. There are a few things worth doing before you sign any return.
Review your return before you sign. You don't have to understand every calculation, but you should recognize the major income sources and the credits being claimed. If something is on your return that you don't recognize, ask about it before you sign, not after. Your signature is a legal attestation that the return is true and accurate to the best of your knowledge. The IRS holds the taxpayer responsible for what's on the return, regardless of who prepared it.
Look at the big picture. Does the refund seem unusually large compared to prior years? Did anything change in your life that would explain it? A dramatically larger refund without an obvious reason is worth a question.
It’s ok to ask for a walkthrough before signing a return, particularly if there are a lot of moving parts and you don’t understand the end numbers. A good preparer should be able to explain the major items on your return in plain language. Where did this refund come from? What is this credit? If the answer is vague or dismissive, that's worth noting.
Make sure you can reach your tax professional. Not just during filing season. If the IRS sends a letter in August, you need to be able to get your preparer on the phone. We’re here to help.
None of this requires expertise. It just requires treating your tax return the way you'd treat any other important document you're putting your name on.
Mark Your Calendar
September 15th: Extended S-corp and partnership returns are due. This is also the Q3 estimated tax payment deadline. Q3 covers June 1 through August 31.
October 15th: Extended individual returns are due. If we filed an extension on your behalf, this is your real deadline. Summer has a way of making October feel far away.
The Q2 estimated tax payment deadline was June 15th. If you missed it, it's not too late to make a past due payment now. There's no magic in the quarterly deadlines themselves. Every dollar you pay now reduces your underpayment exposure and the interest that accrues on any shortfall.
Maine Wildlife Facts
We came across a dead opossum on the side of the road near our house. This one was not playing dead. He was definitively, unambiguously dead. But the boys were right to do a double take. It was not just a weird-looking raccoon. A Virginia opossum is not something you'd expect to find in Maine.
Virginia opossums are North America's only native marsupial, and they're relative newcomers to Maine. Their historical range barely reached Maryland. Warming winters and expanding suburban habitat have been pushing them steadily northward since the early 1900s, and they've now established themselves across much of New England, Maine included. UMaine researchers have found that conditions in central and northern Maine are becoming increasingly hospitable for stable opossum populations. They arrived here without any fanfare, and most Mainers probably don't realize they've moved in.
The playing dead behavior, called thanatosis, is involuntary. The opossum doesn't decide to play dead. It goes into a catatonic state triggered by extreme stress, complete with slowed breathing and a convincing enough performance to fool most predators. The animal can remain in this state for minutes or up to several hours before recovering and wandering off. Given that, the boys were wise to be skeptical. A “dead” opossum on the side of the road may simply be passed out.
These Maine wildlife facts have been brought to you by Will (7), Frank (4), and Catherine (2), Flying Point Advisors' on-staff naturalists.
Questions about any of this? Just reach out - I read every email and love hearing from you. Thanks for reading. You'll hear from me again in about two weeks.
-Mike
Disclaimer
The Flying Point Update is provided for general educational and informational purposes only. The content in this newsletter reflects my thoughts and observations on tax, accounting, and financial planning topics, but should not be considered personalized tax, accounting, or investment advice for your specific situation.
Tax laws are complex and change frequently. The information presented here is based on current tax law as of the publication date and represents general concepts that may not apply to your circumstances. Every individual and business has unique factors that affect their optimal tax and financial planning strategies.
Before making any financial decisions or implementing any tax strategies discussed in this newsletter, please consult with a qualified tax professional, CPA, or financial advisor who can evaluate your specific situation. If you'd like to discuss how any of these topics might apply to your circumstances, I'm always happy to chat.