The evidence is coming in, and it makes absolutely perfect sense: The federal and state governments are ramping up tax examinations and collections to bring in more money.
Just this morning in our tax and bankruptcy law firm: Five new cases, not including the other tax cases on my desk. I sensed this was coming. It's a no-brainer for a policy-maker: Why raise taxes and antagonize the citizenry, when you can just enforce more aggressively what's already on the books?
The difference between what is collected on time and what is legally owed to the government is known as the "tax gap." IRS has examined the problem and published its a study.
IRS estimates that, for the 2001 year studied, the federal government was losing about 15 to 16.6 percent of the dollars owed to it. (Since most states mimic the federal tax scheme, the state loss in Maryland, Virginia and the District of Columbia would be comparable.)
As a dollar figure, it amounts to between $312 billion and $352 billion. Collecting that is not chump change and would have a significant impact on public financing. Hence the collection initiative.
According to the study, there are three components making up the "tax gap":
1) Failure to file tax returns.
2) Underreporting of actual income on tax returns.
3) Underpayment of the tax stated on the tax return.
Underreporting occurs when the taxpayer files a return but omits reporting some income and/or overstates or takes deductions or credits to which they are not entitled, whether purposely or out of ignorance.
Underpayment occurs when the tax return is filed reporting the correct tax amount, but the taxpayer does not, or cannot, make full payment when due.
Many of the tax problems we see in this office can be traced to incompetent or downright criminal tax preparers. However, when the taxpayer is caught by the IRS or state tax agents the tax preparer will be of interest to them, but the tax preparer's conduct generally is not a defense for the taxpayer to the tax liability.
My advice: Avoid a tax preparer without demonstrated licensing, education, and experience. Some questions to ask:
- What are your credentials? Generally, you can trust tax preparation by a CPA, tax attorney, or a preparer with a large, national company that has been in business for a long time.
- Of what tax organizations are you a member? Membership in an organization indicates they are serious about what they do, want to keep up with developments in the field, and are not afraid to be in the company of peers.
- What education do you have? Look for a bachelors degree in accounting, finance, or business administration.
- Do you have a license? Attorneys need to be licensed in the state in which they practice or offer services, and CPAs have to pass a rigorous exam. Unfortunately, generally you do not have to be licensed to offer tax preparation services. (Although the IRS is considering licensing.) At a minimum, ask to see a business license, which is required in most jurisdictions. This will indicate the preparer is not afraid to make himself or herself known to the local government and meet some basic qualifications.
What the most current tax scams we are seeing perpetrated by fly-by-night tax preparers:
- Taking TWO head of household deductions by having the couple do two tax returns claiming they live in separate residences. Often they use a relative's address.
- Qualifying for the earned income credit or taking more exemptions by claiming children who do NOT reside with the taxpayer.